Foreign Currency Report 19 February 2007

GBP
Last week was a hard week for the British pound as poor economic data caused Sterling to under perform against both the Euro and US dollar. The EU Commission raised their GDP forecast for the UK from 2.6 percent to 2.7 percent for 2007.

It would seem that at this stage in the financial year, the chance for a rate hike in March is getting slimmer. However, as we have seen with previous rate decisions in the UK, things can change frequently and next week's busy economic calendar could easily shift the market's outlook.

The Bank of England will be releasing the minutes from their monetary policy meeting earlier this month. The most important takeaway from the report will be how the members voted. If the decision to leave rates unchanged was unanimous, then the odds for a rate hike in March will be very low. If at least 2 members voted in favour of a rate hike, then market expectations will quickly adjust to reflect the possibility of 5.50 percent rates in March.

EUR
The Euro gathered strength following a barrage of disappointing US economic data against an increasingly hawkish Central Bank in Europe. Economic data in the Eurozone continues to outperform with the trade surplus increasing from 2.0 billion to 2.5 billion in the month of December.

French non-farm payrolls increased by 0.2 percent in the last quarter of 2006r, which was right in line with expectations. The hawkishness continues to be reflected in the comments from European officials. Analysts have said that the economy is running at full steam while others believe that the ECB cannot be calm on inflation risks.

In the week ahead, there are number of second tier Eurozone data such as French GDP, consumer prices, Eurozone current account and industrial orders. The most important release is the German IFO report on Friday. Business sentiment is expected to hold steady but many traders are suggesting that the risks are skewed to the downside since January's optimism may have stemmed from the aggressive consumer spending that we saw in the month of December.

NZD/USD
The New Zealand dollar has rose to three-week highs, at the end of the week, the biggest fluctuation of any currency.

Economists surveyed by Bloomberg now expect Reserve Bank Governor Alan Bollard to raise the benchmark rate a quarter-point to 7.50 percent in March. At the same time, investors in America are increasing bets Federal Reserve Chairman Ben. S. Bernanke will cut his target rate from 5.25 percent this year.

Currency strategists at the Bank of New Zealand said the 'Kiwi has been supported by upbeat data, which heightened expectations the Reserve Bank will raise rates in March. We're bearish on the U.S. dollar, with the recent string of disappointing data casting doubt over how fast the U.S. economy is expanding.''

Retail sales in New Zealand rose in December, and January house sales gained 19 percent from the year-earlier month, according to a report from the Real Estate Institute.

U.S. housing starts slumped 14.3 percent in January, A report on Feb. 16 showed. A second report showed prices paid to producers fell 0.6 percent from December.

Federal Reserve funds futures suggest a 32 percent chance the Fed will lower its key rate a quarter-percentage point to 5 percent at its August meeting, compared with a 10 percent chance a week earlier. The Fed stopped raising rates in June.

By comparison, there is an 84 percent probability Bollard will lift rates on March 8, according to analysts calculations, based on overnight interest-rate-swaps trading.

Mr Bollard said at the end of January that it was likely he would raise rates unless he saw moderation in housing and domestic demand.
New Zealand's dollar has gained 5.6 percent in the past three months, the best-performing of 17 major currencies tracked by Bloomberg, as investors are lured to the higher yields.

The world's biggest movers are based on changes in price or yield and are screened for the size of the market and amount of daily trading.

USD
The only important of piece of economic data the market is looking towards is consumer prices. Weakness is expected by traders and will not come as a surprise. Inflation is dropping around the world, but all of the central banks believe that this drop should only be temporary given the resurgence in energy prices this month.

Furthermore, housing is the Federal Reserves number one focus and the market will not receive any more housing related data until next week. This means that the dollar could consolidate this week, especially against the Euro given its lack of meaningful data other than the German IFO report.