Foreign Currency Report 13 March 2007

GBP

The Royal Institution of Chartered Surveyors (RICS) said 24% more of its members reported a rise in prices than a fall during the month, down from 28% in January. Figures show that house price growth has now slackened to its slowest pace since May last year, with the pace of increase only just above the long run average of 21.6%. Supply conditions and a strong economy continue to support underlying house values, but interest rate hikes have begun to weigh heavily on buyer affordability, RICS said. Almost 20% more chartered surveyors reported a fall over a rise in new buyer enquiries during February. Experts believe demand is likely to weaken further in the coming months as January's base rate hike begins to take effect on the market. New instructions to sell property have now gone nine months without a rise, figures showed - the longest stretch in seven years. The stock of unsold properties on surveyor's books has fallen to its lowest level since July 2004. A shortage of available housing has helped price growth in London and the South of England, but there are signs of a slowdown elsewhere, RICS said. The market in Scotland and Northern Ireland remains robust, but parts of England recorded weaker price growth, with small falls seen in the East Midlands." Sterling fell against the yen and euro on Monday 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 has sold off most sharply during recent bouts of carry trade unwinding.

Euro

The Euro rebounded strongly yesterday thanks to hawkish comments from ECB member Liebscher and overall dollar bearish sentiment. Liebscher reminded traders that the central bank's work is not over because he feels that inflation is still a risk. He even indicated that he would be willing to vote in favor of raising rates again at the expense of growth. After raising interest rates to 3.75 percent last Thursday, ECB President Trichet toned down his degree of hawkishness to signal a pause in April and potentially in May as well. However another rate hike in June is still possible depending upon how the Eurozone and global economy fares. The German ZEW survey of analyst sentiment is due for release today along with Eurozone industrial production. Analysts tend to be more pessimistic than companies which suggest that we could see a drop in analyst sentiment for the month of March. With the increase to the Value Added Tax finally having an impact on the economy and the ECB raising rates recently, the tighter business conditions is a good reason for analysts to pare back their expectations for growth. Given the weak Italian industrial production numbers, manufacturing activity in the region as a whole could deteriorate.

USD

The U.S. economy in February created the fewest jobs since January 2005, the Labour Department said Friday, but continued hiring, and solid wages suggest consumers will remain strong. Employers added 97,000 people to nonfarm payrolls in February. That was in line with views. Also, in what's become routine, Labour revised up jobs for the prior two months, this time by 55,000. And average hourly pay jumped nearly 0.4% last month. "This report suggests that the labour markets are still strong and may be tightening and you're still getting good salary growth," said Richard Yamarone, chief economist at Argus Research. The jobless rate ticked down to 4.5%, near a five-year low. But that's because more people left the labour force, according to the separate household survey. Fed funds futures suggest the market sees less of a chance the Federal Reserve will cut interest rates to prop up the economy. Expectations for a rate cut had spiked on weak economic data, subprime woes and general market turmoil. But Fed officials have stayed upbeat, giving no hints that a rate cut could happen. While ex-Fed Chairman Alan Greenspan has said recession is "possible," current policymakers are more worried about inflation. Average hourly wages rose 4.1% vs. a year earlier. "We could be looking at wages driving inflation," said Joel Naroff of Naroff Economic Advisors. At the same time, that higher pay should keep the economy afloat. Growth "may not be zooming along, but it doesn't appear that there are any threats that the economy will slow down sharply," Naroff said.