Market Report

GENERAL NEWS
China's push to diversify its $1.07 trillion currency reserves, including setting up a new fund management agency, won't cause a slump in U.S. securities, Prime Minister Wen Jiabao said. "Our purchases of U.S. dollar assets are mutually beneficial," Wen said at a press conference during the annual meeting of China's legislature in Beijing. "Setting up of the new agency won't affect the value of the U.S. dollar assets."
China, the second-largest overseas owner of Treasuries after Japan, lifted holdings by $4 billion to $353.6 billion in January as a record trade surplus swelled foreign-exchange reserves. Wen said China lacks experience in investing overseas and aims to increase the "safety" of its holdings when diversifying, suggesting the process will be gradual.

UK
Sterling steadied against the Euro on yesterday after hitting an eight-month low the previous day as investors trimmed exposure to carry trades investing in high-yielding currencies like the pound. Major currencies have stabilised after a recent sell-off in high-return assets as stocks rebounded and investors paused to assess the climate for risk. Sterling was still suffering a mild bout of unwinding of carry trades as it had been one of the biggest beneficiaries of the strategy with British interest rates at 5.25 percent
Pay settlements have picked up in both the services and manufacturing sectors. So, it is becoming increasingly clear that higher inflation in the second half of last year has had an impact on pay. But the modest size of the pick-up in settlements makes us think the MPC will halt tightening policy after one further 25 basis points increase.

EUROZONE
With regards to economic data it is a quiet day for the Eurozone. The most noteworthy release in the Italian trade data for Jan due at 9.00

US
The dollar declined to the weakest this year against the Euro as a U.S. report today will probably show confidence among consumers fell to the lowest in six months, raising concern economic growth will slow. The U.S. currency headed for the biggest weekly loss since early December as the yield premium investors earn on two-year Treasuries over similar-maturity German bunds this week fell to the smallest in more than two years. It has dropped against 11 of the world's 16 most-actively traded currencies this week.
Economic data, the US takes centre stage today, with the Feb. CPI and Industrial Production (IP) releases due at 12.30 GMT and 13:15 GMT respectively. Finally in the US, the preliminary Mar. reading on consumer sentiment from the University of Michigan (released at 14:00 GMT)

JAPAN
Japan Vice Finance Minister for international affairs Watanabe said in Sydney today that the unwinding of carry trades had not been a threat to the market, with only short-term trades being liquidated. He had also said in Paris last week, "In Japan, for the past 20-30 years, we have a lot of domestic savings. These funds are moving abroad because people are investing abroad. If we are to call this a carry trade, then carry trades are likely to continue." This is totally in line with what we have argued for more than a year. Namely, the Japanese household sector has been structurally shifting funds from deposits to overseas assets, which could bring JPY lower in the medium-term.

NZD
England play New Zealand later today in their opening World Cup Cricket match if they take their lead from GBP's rise against the Kiwi overnight they should do well !!!

DH

GENERAL NEWS
The Yen dropped against the U.S and New Zealand dollars as a rebound in global stock markets gave traders more confidence to buy higher-yielding assets with funds borrowed in Japan.
The Yen also against the Euro as investors resumed the so-called carry trades. European Central Bank officials today may indicate they will push borrowing costs higher this year, increasing the gap over Japan's 0.5 percent rate. New Zealand central bank governor Alan Bolland today suggested the country may have to raise rates from 7.50 percent.

UK
As we have been saying here for sometime the U.K. pound may continue to drop versus the Euro on speculation investors will keep unwinding holdings funded by lower-yielding currencies.
The pound has fallen this week as a plunge in equity markets caused investors to dump riskier assets, where they borrow in lower-yielding currencies to fund purchases of higher-yielding assets. The pound has benefited from interest rates in the U.K. at 5.25 percent compare with borrowing costs as low as 0.5 percent in Japan.

EUROZONE
A plethora of data release from Europe today may well see the single currency strengthen against other major currencies.

US
Tighter credit standards among mortgage lenders might lower U.S. home prices by 10 percent this year and push the economy into recession, a Merrill Lynch & Co. analyst said in a report.
New Century Financial Corp., the second-biggest subprime lender and other mortgage companies may fail as the number of customers falling behind on payments rose to a four-year high. More than 20 subprime lenders have closed or sought buyers since the start of 2006 and bank regulators are pushing lenders to raise credit standards.

SA
South Africa's rand advanced against the dollar for a second day as the price of gold, the country's largest single export, rose and as investors resumed buying emerging market assets.

DH

GENERAL NEWS
Yesterday we saw sterling struggle against all the major currencies, with GBP/USD trading in a range of 2 cents, and GBP/EUR falling 1 cent.

UK
At 9.30 this morning we see the release of Labour market statistics. It is expected to show a decline of 8,000.

EUROZONE
At 10.00 this morning we see the release of Industrial Production figures, which is expected to show a decline of 0.2%. This figure is made up of gains in Germany and weak figures in the rest of Europe.

US
At 12:30 today we see the US balance of payments data for Q4. We expect to see the current account deficit to narrow to 203.5bn, down from 225bn.
The dollar lost ground on Tuesday as mortgage concerns caused further unwinds in carry trades.

DH

GENERAL NEWS
The U.S. economy is not falling out of bed, but neither is it tucked in safely.
The job market, it turns out, is not as turbulent as many on Wall Street feared. Worries about a possible decline in hiring were formed mostly in the panic following a massive downdraft in global stock markets.
Investors might keep this in mind before rejoicing too loudly.
The February payroll number was flattered by a jump in government jobs, and the 58,000 rise in private payrolls was the smallest since November, he added. There are clear warning signs of deterioration ahead.
Historically, this sort of employment growth is nothing to write home about. Job creation in the fourth year of the 1990s economic recovery averaged more than 300,000 a month.
In troubled sectors of the economy such as housing and manufacturing, the economic trends are still mostly downward.

UK
Sterling continued to fall against the yen and Euro yesterday as appetite for risk evaporated and fresh concerns on the health of the U.S. housing market caused investors to exit sterling-supportive carry trades.
The pound had been one of the main beneficiaries of carry trades, as investors borrowed cheaply in yen and ploughed the proceeds into higher-return assets. So it has also been one of the currencies that have sold off most sharply during recent bouts of carry trade unwinding.
Figures released yesterday showed that UK house prices rose at the weakest pace in nine months in February as the number of Britons browsing dropped to a two year low.

EUROZONE
At 10 am we see the release of the ZEW March German economic expectations index to we expect it to be the first positive reading since July 2006 which will be positive for the Euro.

US
In the US, this afternoon we have February retail sales (12.30pm) While the rise in February retail gasoline prices should drive the nominal value of sales higher, survey reports indicated weather-induced sluggishness in sales activity, while vehicle sales were roughly flat in the month.

NZD
NZ retail sales came out on the stronger side of market consensus. Headline retail sales grew by 0.5% against expectations for a 0.2% rise

DH

Friday saw the release of the non-farm payrolls from the US which came in stronger than expected which helped to bring some calm back to the market. Economists hope this data release will show everyone that the US economy is not in as bad a state as everyone had predicted.

This weeks sees some important inflation figures from Europe mainly from Hungary, Poland and Slovakia.

Despite three interest rate hikes in the UK since September, we are still seeing house price growth despite some calming down.

Enjoy your week.

DE

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