NEWS / Foreign Exchange

BoE, PBoC, ECB

The biggest percentage change in bond markets was in Canada, where the long end of the yield curve eased back as the Bank of Canada left rates steady while downgrading GDP outlooks but citing ???slight??? upside inflation risks. As a result, the central bank is even more likely to maintain a steady hand throughout 2007, barring an outright plunge in prices. Meanwhile, Australian and New Zealand yields have fallen lower at both ends of the curve as softer CPI has crushed prospects for an RBA hike next week while the RBNZ is widely anticipated to leave rates steady this week at 7.50%. These are both very encouraging signals for each respective economy, as their benchmarks remain some of the highest in the developed world, severely limiting prospects for domestic growth. Nevertheless, until consumption and credit growth cool, RBA and RBNZ rates will likely remain lofty for quite some time.

BoE ??“ May 10th Rate Decision Set to Make or Break British Pound

Mr. King??™s determination to quell inflation and Ms. Barker??™s concerns regarding housing price growth have led markets to believe a 25 basis point hike is in the cards in May, but any deviation from expectations could send GBPUSD reeling:

• Mervyn King, Bank of England Governor
  ???The Monetary Policy Committee still expects inflation to be closer to our target figure of 2 percent once this short term volatility, brought about by a number of factors such as energy price increases, has disappeared. We are absolutely determined to bring inflation back to 2 percent.??? ??“ April 20, 2007
  ???Most measures of inflation expectations are close to target??¦there is no evidence of a significant pickup??¦Asset prices are driven by low real rates around the world??¦the impact of higher asset prices is not linked exclusively to UK monetary policy and money supply and credit growth here.??? ??“ April 24, 2007

• Kate Barker, Bank of England Monetary Policy Committee Member
  ???Minor changes in the housing market are not going to make us change interest rates but the fact that the housing market has picked up strongly over the last year is significant. The rise of housing prices over the last year has been linked with the big fall we've seen in long-term real interest rates and to some extent with the restriction of supply in the housing market compared to demand.??? ??“ April 24, 2007

PBoC ??“ Under Pressure

The surge in Chinese Q1 GDP has brought the yuan and imbalances to the forefront once again, especially amidst trade conflicts between the US and China. Will the People??™s Bank of China buckle under the pressure and tighten monetary policy?

• Wen Jiabao, Chinese Premier
  ???We need to prevent the economy from shifting from relatively fast growth to a state of overheating and to prevent big ups and downs. We will work hard to keep basic stability in the overall level of prices.??? ??“ April 19, 2007

• Wu Yi, Chinese Vice Premier
  ???The United States Trade Representative, the USTR, has totally ignored the massive strides China has made??¦This will have an utterly negative impact and will inevitably badly damage bilateral intellectual property cooperation. The Chinese government is extremely dissatisfied about this, but we will proactively respond according to the related WTO rules and see it through to the end.??? ??“ April 24, 2007

• Hiroshi Watanabe, Japanese Vice Finance Minister for International Affairs
  ???I think it (China??™s economy) is overheating. Today they announced 11.1% first quarter growth. This is a sign of not controlling the economy well??¦The pace of foreign reserve increases is causing trouble. It could have some impact on financial markets. Most of the flows have been sterilized, but some still remain. That could affect the real estate and equity markets in China.??? ??“ April 19, 2007

• Charles Collyns, Deputy Director of the IMF Research Department
  ???China is one of the major economies taking part in consultations...that are trying to look at global imbalances and consider the implications of these imbalances on policies, including exchange rate policies. It??™s less about meddling in China's affairs. China is part of a community of countries that are together grappling with major issues facing the global economy.??? ??“ April 24, 2007

ECB ??“ On Hold Until June

European Central Bank officials remain keenly aware of inflation risks, but the markets are waiting for the return of ???strong vigilance??? before expecting another rate hike:

• Lucas Papademos, European Central Bank Vice-President
  ???The president and myself speak with one voice. He noted, and I share his view, that he did not intend to say anything that could alter market expectations on the stance of policy in the next few months, but he also stressed that ... we make no pre-commitments about the future orientation of policy.??? ??“ April 24, 2007
  ???Risks to the medium-term outlook for price stability remain on the upside.??? ??“ April 23, 2007

• Axel Weber, European Central Bank Governing Council
  ???I believe that in the current economic climate, we cannot give the all-clear sign in terms of monetary policy. We have to closely monitor the medium-term risks to prices, and act when warranted.??? ??“ April 20, 2007 ???If we only paid attention to business cycle developments, the danger would be immense that we would fall behind the curve with monetary policy.??? ??“ April 24, 2006

• Joaquin Almunia, EU Economic and Monetary Affairs Commissioner
  ???Economic growth in the Euro-zone was increasingly subject to external risks and said that countries must remain vigilant.??? ??“ April 23, 2007

• Jose Manuel Gonzalez-Paramo, European Central Bank Executive Board Member
  ???We see new increases in oil prices, a possible new round of salary hikes and a rise in indirect taxes such as value added tax as the three main risks to Euro-zone inflation??¦We must be very vigilant that observed inflation does not deviate from real inflation. If people think that inflation is higher, they will start acting in accordance, which could affect consumer demand and (bring into) question the credibility of the central bank. This has not happened and it shouldn't happen.??? ??“ April 20, 2007