Overview

Relentless US Dollar weakness has been missed by some because the Yen has not joined in the move, the Euro and Sterling are still below their highs of this/last year, and the Swiss Franc is a victim of the ???carry trade??™. Year-to-date the best performer is the Thai Baht +8.5%, then the Iceland Crown +8.2%, the Australian Dollar and Slovakian Koruna +5.5%, closely followed by the Brazilian Real +5.0%. Not only are these big moves over a three month period, but we are also at historically key/high levels and some Eastern European currencies are at their strongest ever versus the greenback. Commodity futures, priced in a devalued dollar, have on the whole rallied the glaring exceptions being Frozen Concentrated Orange Juice (FCOJ) and Cotton. Precious Metals have done well, Silver and Palladium leading, while the energy group is also up quite a bit because of the currency coupled with supply pressures. Front month US Gasoline futures are trading at $2.20 per gallon, not that far off last year??™s high of $2.50. Stock markets were a mixed bunch, European ones up a little for a second week running, US ones unchanged, while Brazil, Korea, Mexico, Poland and Singapore set new all-time highs. Interest rates were also mixed, US ones giving back some of last Friday??™s increases, while Europeans moved to new highs for this year. At the press conference following the ECB??™s decision to keep rates unchanged at 3.75% a rather hawkish Mr. Trichet hinted that a repo rate of 4.00% was possible by June. Two-year Schatz hit 4.13%, ten-year Bunds 4.21%, and ten-year Gilts 5.07%, their highest yield since August 2004.

Political and Economic Developments

Australian Unemployment was just 4.5% in March, the lowest in 31 years; mining stocks pushed the All-Ordinaries index to a new all-time high. The Baltic Dry Freight Index is also back up close to its record high of 2004 although Tanker rates remain very subdued. In a surprise move the Thai central bank cut interest rates by 50 basis points to 4.00% to boost economic growth and curb the currency. Perhaps they should have thought of this before tinkering with markets and capital controls. The Baht, at 35 to the US dollar, is at its strongest since August 1997 and worth almost twice as much at its Asia crisis low point.

Underlying Themes

The fourth anniversary of Baghdad??™s invasion saw a massive Shia rally in the holy city of Najaf. Tens of thousands of radical Sadrist supporters from the south of the country, having kept a low profile over the last two months, reinforced their image as strong grassroots activists. They are once again threatening to pull out of the government because the new US-Iraqi security crackdown has targeted Shia militias. Difficult enough to get politicians around the table, and now a suicide bomber manages to detonate a bomb at lunchtime inside the cafeteria of the heavily guarded parliament house. The message is clear: no one and nowhere is safe. The International Committee of the Red Cross said ???the humanitarian situation is steadily worsening and it is affecting, directly or indirectly, all Iraqis??™. The suffering that ordinary people are enduring is unbearable and one third live in poverty. Hospitals, stretched to the limit, have to contend with doctors and nurses fleeing to save their lives. Little and dirty water, power shortages, malnutrition, unemployment, displaced persons and above all violence.

What to watch for next week

This weekend G7 finance ministers meet in Washington, together with Russia, Saudi Arabia and the United Arab Emirates. China declined because of ???domestic policy??™ priorities. The IMF and World Bank Spring meeting is also this weekend. Monday early UK April Rightmove House Prices, Tokyo March Condominium Sales, UK March PPI and EZ13 CPI. Then US February TICS flows, Business Inventories, March Retail Sales, April Empire Manufacturing Survey and NAHB Housing Market Index. Tuesday Japan March Consumer Confidence, UK CPI, EZ13 February Trade Balance and Germany??™s April ZEW Survey. US March CPI, Housing Starts and Building Permits, Industrial Production and Capacity Utilisation. Wednesday the Bank of England??™s 5th April MPC Minutes, March Unemployment and February Average Earnings and EZ13 Construction Output. Thursday Japan??™s February Tertiary Industry Index, German March PPI, the ECB??™s April Report, US March Leading Indicators and April Philadelphia Fed Survey. Friday just Japan??™s February All Industry Activity Index, March Convenience Store Sales and UK Retail Sales. Saturday 21st Nigerian presidential and national assembly elections; Sunday 22nd the first round of French presidential elections plus parliamentary elections in Syria.

Positioning and Technical Analysis

We are expecting a busy fortnight with potentially big price swings and strong moves. Weekly closing prices today should be scoured for important Technical breaks. US dollar weakness may accelerate sharply through key levels, and moves may snowball into something quite scary. This will supply an underlying bid to anything priced in dollars but will have a more complex and tricky effect on non-dollar assets. Platinum Group Metals are our favourites at the moment, closely followed by Copper and Tin. Interest rates are unlikely to move in tandem; rather country-specific issues should determine their moves. Our ultra-long term view has not changed and we favour rates peaking very soon and then drifting lower over the next six months. Stock indices, like Yen crosses, are subject to a sudden clear-out and corrective move lower again this month.