Despite ECB head Jean Claude Trichet’s weekend observation that the world might be near a turning point courtesy of government and central bank action thus far, currency markets have responded more vehemently to a worsening outlook from the World Bank. It takes the crown away from the IMF with its far more pessimistic economic outlook as it predicts the first global shrinkage since the Second World War, and an unprecedented decline in global trade. The Monday morning session gets off to a positive start for the dollar as the theme of risk aversion mounts.

One of the big weekend losers has been the British pound, which in one sense we find bemusing. The pound has shed three cents to $1.3790 this morning while the British government prepares to go on a government and corporate debt-buying spree to the tune of some £75 billion. Perhaps only £10 billion of the total will find its way into corporate bonds, but the step announced last week accompanying a halving of British interest rates will push yields down. Indeed in this morning’s trading gilt yields have reached the lowest in at least 20 years.

The big negative though for the pound is the virtual nationalization of the nation’s largest mortgage lender, Lloyds TSB. The bank has swapped out some of its equity by accepting state guarantees on £267 billion of its assets. Add in the admission from HSBC’s top-brass that its earlier foray into the U.S. consumer and housing loan business with its acquisition of Household International was a mistake, and once again we find the entire financial sector under fire. The reason we note that today’s pressure on sterling to be a little strange is that, once again we observe the British to be ahead of the pack in admitting mistakes and mopping up the spilled milk. Compare this action to the untimely Trichet remarks at the weekend and perhaps you can understand our point. Certainly the market disagrees today with the pound falling to 91.25 pennies against the euro.

Further evidence of Japanese domestic weakness emerged overnight leading to further weakness on its yen, which is at ¥99.05 against the dollar this morning. The first trade deficit in 13 years shows the lack of appetite for Japanese exports in the face of a yen bloated by risk aversion fears.

The theme though that the Australian dollar remains somehow protected by Asian demand for its exports continues to play out. While the Aussie dollar is lower buying 63.50 U.S. cents today from 64.10 on Friday, the Canadian dollar is has finally weakened beyond our immediate target of $1.30 today, losing 1.3 cents since ahead of the weekend. Fears over a deeper recession continue to weigh heavily and are taking larger chunks out of the value of Canada’s dollar relative to that of the Australian dollar. We eagerly await unemployment data later this week from Australia, which is likely to show a rate of 5% with 20,000 more Aussies losing their jobs. There is an increasing crowd of players doubting that there will be a revisit to the panic-lows for the Aussie based upon a relatively stronger Asian Pacific rim. We’re not so sure they’ll be right in that prediction.