NEWS / Foreign Exchange

BOE Testifies to the Treasury Committee

- The European indices are trading sharply lower today led lower by a few unfavorable earnings reports and trading updates ahead of the open, including a poor trading update given by Yell group, and poor results from Alcatel-Lucent.

- European government bonds are currently trading higher in the session as investors move to the safety of bonds in the face of declining equity markets. Similarly in the UK gilts are trading higher ahead of today??™s auction.

The Swiss trade balance fell by more than expected in March to a surplus of CHF 718M from a surplus of CHF 1.38B in February; the trade balance was expected to decline to a surplus of CHF 1.11B.

- The Italian consumer confidence indicator for the month of April, which was expected to rise to 112.8 from 112.6 in March, fell to 107.8, its lowest level since May of 2006. The decline in consumer confidence reflects household fears about the future of personal finances as well as the economy in general.

- Italian retail sales for the month of February increased by less than expected to 0.2% m/m and 0.4% y/y in February from ??“0.4%m/m and 0.0% y/y in January. Growth from January to February can be attributed mainly to increased sales in non-food goods.

- March public finances rose by more than expected to ??17.2B in March from ??2.2B in February, while net borrowing rose by more than expected to ??8.5B in March form ??0.6B in February.

- The ECB??™s Tumpell-Guggerel said in a newspaper interview published overnight that the European growth outlook remains favorable, noting that the ECB is following wage developments closely. Guggerel said that he is confident that inflation will remain below 2.0% in 2007, and expects that it will rise towards the end of the year.

- The IG Metall union in Germany overnight threatened to commence strikes as soon as Sunday. The Union said that strikes are subject to a better wage hike offer.

- In a testimony to the UK Treasury Committee, the Bank of England??™s Besley said that cementing low inflation is an on going challenge, noting that there appears to be short-term volatility in CPI. The BOE??™s Blanchflower reassured that the BOE will do what is necessary to ensure that inflation returns back to its target. The BOE??™s Sentance said that the longer that inflation is above target the greater the risk that it will hit expectations. The BOE??™s Barker said that the pick up in the housing rate is a result of low interest rates and supply. Barker also said that business surveys have been positive, and that price expectations are a worry. Barker followed saying that demand growth is stronger than anticipated some time ago, and noted that if energy prices are taken from the equation, the move from the CPI target is not that significant.

- EUR/CHF - The Swiss National Bank's Hildebrand is scheduled to speak about the Franc exchange rate at 12:15 ET today. Investors will be looking for any reference to the carry trade today as well as Swiss inflation. With the EUR/CHF at 8-year lows, it is beginning to hinder monetary policy adjustments made by the SNB in an attempt to curb inflation. As the Franc weakens it neutralizes interest rate hikes. If the Franc continues to remain weak and undermine or impede SNB policy the SNB may acknowledge and confront the situation with some sort of intervention, however it is difficult to define the line where the exchange rates impede growth. Note also that, since December, the SNB has taken a hawkish tone on inflation, however inflation data has been relatively soft, prompting the SNB to sit back and wait before raising interest rates again.  Following is a recap of a few of the more recent comments from the SNB's Hildebrand in reverse chronological order from early 2007 to mid-2006. On February 6 Hildebrand said that more rate hikes needed if growth stays robust, warning firms that F/X rates are not fixed, furthermore noting that a weak Franc poses an inflation risk. On December 14 Hildebrand said that he sees clear signs of slowdown in US economy, noting that the chances of a soft landing were good. Hildebrand also said that the CHF carry trade is partly the cause of weak currency, noting that such trades are 'normal'. On November 9 Hildebrand said that the SNB is flexible and noted that no imminent price is threat needed for the SNB to raise rates. In an interview on October 30 Hildebrand said that the Swiss Franc's development on currency markets was a "conundrum", while adding markets should not assume exchange rates would stay as stable as they had in recent years. Finally on July 24 Hildebrand said that the Swiss Franc now has limited safe-haven functions.

- USD/JPY EUR/JPY - Japanese life insurance company Dai-Ichi Life announced overnight that they will be boosting Yen bond holdings in 2007, and intend to keep foreign bond holdings unchanged. This has been a recent trend emerging amongst the insurers in Japan, the implications of which should ultimately strengthen the Yen. If the insurers are bringing money home and plan to reinvest the money at home (as they will not be reinvesting it abroad, hence leaving foreign bond holdings unchanged) this could eventually form support from which the Yen could strengthen if the trend continues.