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Yesterday saw some interesting data out from the UK and Europe and a series of official interest rate reductions from around the globe.

Taking the latter first, we got a 0.25 cut from the Reserve Bank of India down to 4.75%, a 0.50 reduction from the Riksbank in Sweden to 0.50% and a 0.25 basis point cut by the Bank of Canada down to 0.25%. Of these 3 Central Banks, the Canadians were by far the most dovish in its accompanying statement, saying that unless there is an unexpected move up in inflation, they expect their interest rates to stay at these lowly levels for at least the next 12-months. They also announced that they will be the latest CB to go down the QE route following an announcement of a framework of measures on Thursday.

From the UK we had the release of the latest inflation data from the ONS which sounded the long awaited capitulation of the Consumer Price Index (CPI) to deflationary pressures, falling from February’s 3.2% down to 2.9%. Unlike the stubborn CPI measure, the Retail Price Index (RPI) continued its slide, registering a decline of nearly half a percent, to a headline figure of -0.4% (down from 0% in February.) This continued divergence between the rates of decline for CPI and RPI (decreases of 0.2% Vs 1.3% in 2009) could provide the BoE with a headache going into their next MPC meeting in early May. The problem arises from the MPC’s requirement to bring CPI in line with the target range of 1.5% to 2.5%, but at the same time they will be extremely conscious that any further falls in RPI will have a dampening effect on aggregate demand (and so serve to prolong and exacerbate falling consumer spending), as wages, pensions and welfare benefits are benchmarked to this inflation rate. In terms of a policy reaction to this data, we are unlikely to see any movement on the interest rate front as the BoE continue to focus on monetary expansion, but at the same time any further increase (or on the back of the RPI figure maybe a decrease) of Quantitative Easing (QE) is doubtful, as the MPC looks to hold off making any rash decisions whilst it assess the results of the measures already in place.

The German ZEW survey was a ‘game of 2 halves’, much as it has been over the last few months, with current conditions almost as low as they can get -91.6 (against a worst case scenario of -100) whilst future economic sentiment rose sharply to +13.0 from -3.5 in March. The Euro strengthened a little on these numbers as the market took heart in the latter indicator but resumed its downward direction on euro/sterling selling interest from a UK clearer.

Going back to the IMF, their respected GFSR pointed to cumulative worldwide financial losses through to 2010 of about $ 4.1 trillion with the US financial system estimated to be in need of as much as $500billion of fresh capital in order to extricate itself from the current mire. Of the total potential losses, Europe excluding the UK are expected to suffer the largest potential write-downs of $1.1 trillion versus the US at $1.05 trillion with the UK and Asia put at $316 billion and $336 billion respectively. The UK number provoked howls of protest from the UK Treasury as being far larger than it ought to be. One has to assume that this sort of total far exceeds the numbers that Mr. Darling is going to produce within this afternoon’s budget.

The IMF Report itself runs to 240 pages long so that proper analysis of its content will take longer than one evening, no matter how avid a reader you are

Today is all UK with lots of data ahead of the Budget this afternoon. I still think Sterling is vulnerable to market reaction to Treasury estimates that are deemed too optimistic. Any weakness however will be temporary and I expect to see a stronger currency by the end of May.

Only other thing today is the elections in South Africa. No effect on the currency expected with the Finance Minister anticipated to remain in situ and monetary policy to remain unchanged.

Ahead we have a G7 meeting this weekend (yes another one) with expectations that Eurozone countries will report that their crisis is now at its trough - barring any unexpected disaster - and that the meeting will likely discuss China’s proposal for using the SDR as a global reserve currency. The statement to follow the meeting will probably just state that Forex volatility is unwelcome …..

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