Sterling Rallies on BOE Mortgage Plan

• The dollar traded mostly higher on Thursday following Luxembourg Finance Minister Jean-Claude Junckers comments that the financial markets have misunderstood the G-7s position on currency volatility and the euros recent advance against the dollar is not desirable. On the contrary, European Central Bank Governing Council member Axel Weber said the strong euro has a "stabilising effect" on the economy. Their contrasting statements show the split between European finance ministers and central bankers, where the latter tends to be more hawkish. The Canadian dollar fell on the Canadian slowing inflation rate fueling speculation the Bank of Canada will cut interest rates 25 basis points next week. The yen fell as increased risk appetite sparked carry-trade demand.
• The GBP/USD rallied on a report that the Bank of England may announce a plan to temporarily exchange troubled mortgage-backed debt on banks balance sheets for government bonds to help banks resume lending. The pair is testing resistance from the downtrend. If this is broken, there is strong resistance at the 2.00 area.

Financial and Economic News and Comments

US & Canada

• The Philadelphia Feds manufacturing index of current business activity unexpectedly fell to -24.9 in April from -17.4 in March. New orders fell to -18.8, the employment indicator was unchanged at 0 and the price indicator eased slightly to a still high 51.6 in March. Overall the indicator signals more weakness in the US manufacturing sector.

• US jobless claims increased a slightly less-than-expected 17,000 to 372,000 for the week ending April 12, the Labor Department said. The four-week moving average for initial claims fell by 750 to 376,000. For the week ending April 5, continuing jobless claims rose by 26,000 to 2.984 million, its highest level since June 2004. The four-week moving average for continuing unemployment claims increased 29,750 to 2.937 million, the highest level since July 2004. Claims will continue to rise.

• Federal Reserve Board Vice Chairman Donald Kohn indicated the Fed may create a permanent "liquidity backstop" for primary dealers in order to ensure the orderly functioning of a securities market. Kohn said extending discount window borrowing to non-depository banks was aimed at avoiding "substantial damage to the financial markets and the economy."

• Canadian CPI inflation rose 0.4% m/m and a less-than-expected 1.4% y/y in March, driven by rising mortgage interest costs, Statistics Canada reported. Core CPI inflation edged down to 1.3% y/y and 0.2% m/m in March from 1.5% y/y and 0.5% m/m in February.

Europe

• Luxembourg Finance Minister Jean-Claude Juncker said the financial markets have misunderstood the G-7s position on currency volatility. "I don't have the impression that financial markets and other actors have correctly and entirely understood the message of the G-7 meeting," said Juncker. The euro has moved in a direction "I dont consider desirable," he said.

• European Central Bank Governing Council member Axel Weber said the ECB will evaluate whether the current interest rate level is still appropriate in the face of soaring energy and food prices. "We will have to continuously monitor closely all incoming data and evaluate whether the current level of interest rates in fact ensures to achieving our objective," Weber said. He expects the German economy to grow close to its potential "even though downside risks persist." The strong euro has a "stabilising effect" on the economy. "A strong euro simultaneously dampens the price of import goods. This helps to curb inflationary pressures resulting from strong rises in energy and food prices," he said.

• The EMU had a 2.1 billion trade surplus in February against a 1.0 billion deficit in January. Exports rose to 134.9 billion in February from 132.3 billion in January in seasonally adjusted terms, while imports decreased to 132.8 billion from 133.4 billion, Eurostat reported.

• The BBC said the Bank of England is working on a lending program that could make it easier for banks to lend to each other. Banks would be allowed to swap mortgage-based assets for government bonds with the BOE.

Asia-Pacific

• Indias central bank increased reserve requirements in an effort to rein in inflation running near a 3-year high.

• China should raise key interest rates and allow the yuan to appreciate further to help fight inflation close to an 11-year high, said Yu Yongding, a former adviser to the Peoples Bank of China.

FX Strategy Update