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London Session Recap

Sterling once again stole the limelight this morning. After a weak start (which took it down to USD1.4888) on the back of yesterday's warnings from Moody's on the banking sector, cable found support as PM Brown gave an address on the economy. With only weeks to go before the general election (favoured to be May 6), Brown acknowledged the need to address the budget deficit suggesting that senior civil servants will have their wages frozen and stressing that the UK will not lose its AAA credit rating. That said Brown also underpinned his party's line that real risks to the recovery remain and that 'we must be alive to them'. Brown announced a budget for March 24 which can be expected to detail the party's plan on the economy more thoroughly. Cable's recovery to the USD1.4960 level was short-lived. The pound was slammed on the release of far weaker than expected January production data. Manufacturing contracted by 0.9% m/m taking the broader measure of industrial production down by -0.4% m/m. These data are likely affected by poor weather; nevertheless they severely dampened the optimism produced by recent surveys which had suggested that the sector was improving. Adding to cable's woes was news that Barclays is looking to buy a retail bank in the US.

The EUR also had a poor start with EUR/USD sinking to 1.3550 at the open encouraged by a surprising sharp fall in German Jan exports (-6.3% m/m) which questions the growth potential of the Eurozone's largest economy. Also circulating is sceptical rhetoric about Greece's ability to implement its promised austerity cuts and general concerns about the lack of fiscal controls within EMU currently. EUR/USD has subsequently stabilised in the 1.3580/90 area.

Chinese exports grew a greater than expected 45.7% y/y in February. Insofar as the overall trade balance did not surprise the data failed to trigger the anticipated rally in risk (Asian stocks were mixed overnight), However, with imports also surging (by 44.7% y/y) these data certainly will serve to underpin concerns about the impact of cheap credit and have focused attention squarely on tomorrow's Chinese CPI data.

The AUD did manage a rally overnight. Chinese import data lent support to comments from RBA official Lowe that the Australian economy is likely to expand at or above its average pace over the next few years. This heightened speculation that the RBA will be hiking interest rates again in the coming months. GBP/AUD continues to grind lower hitting a new low this morning at 1.6248. Although economists are expecting no change from tomorrow's RBNZ policy meeting AUD/NZD has softened ahead of the news.

The JPY has weakened overnight. Japanese machinery orders were weak and underpinned the likelihood that the BoJ will act further at the Match 16 BoJ policy meeting to stimulate the economy. Reports that the BoJ is not being pressured by the government into buying more JGBs increases the likelihood that the BoJ may extend Dec's 0.1% fixed rate lending facility which was a key factor in chasing USD/JPY higher in Dec.

US wholesale inventories data and the US budget statement will be released this afternoon. Trichet is also scheduled to speak.

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