STERLING INTEREST RATE CARD MAXED OUT


And UK economic shrinkage in Q4 was worse than expected. Canadian interest rates expected to be unchanged this week.


Sterling was the second worst performer among the major currencies, only avoiding the bottom slot as a result of the tragic earthquake that consigned the New Zealand dollar to last place. A seesaw motion took the pound a cent lower against the Loonie, two and a half cents higher and four and a half cents down. When London opened this morning it was close to its lows and wearing a net three cent loss on the week.


Wednesday morning was a last hurrah for the sterling interest rate story. After weeks of anticipation that had included a 4% inflation rate and multiple calls for the Bank of England to be seen to be doing something about the situation the Bank of England published the minutes of the February Monetary Policy Committee (MPC) meeting. Investors were not disappointed by the minutes. The number of votes for a rate increase had risen from two to three. One of the members, Andrew Sentance, had gone for a showboating half percentage point rise. He and Martin Weale had been joined on the hawks' bench by Bank chief economist Spencer Dale. But that was it. No bullets left. Sterling had maxed out its interest rate card for the time being.


And there was worse to come. The CBI's distributive trades survey was a disappointment, at least in terms of sales achieved. Thirty six per cent of retailers reported a rise in sales between 28 January and 16 February compared with the same period last year, an eight-year low, while 30% said sales were down. It was a far weaker outcome than expected. Balancing that disappointment, at least from sterling's standpoint, was the news that 77% of shops put prices up in February. Retailers might not be selling much but at least they are stoking inflation.


On Friday the first revision to fourth quarter gross domestic product (GDP) showed that instead of shrinking by -0.5% the UK economy shrank by -0.6%. The news cost sterling half a cent there and then against the US dollar and the euro.


The Canadian dollar's poor early showing was principally collateral damage suffered by all the commodity-oriented currencies as a result of the slow-motion revolution going on in Libya. Investors worried that it would mean an interruption in oil supplies, especially when industry analysts estimated that production in Libya itself had already been cut by a half or more. After a promise by Saudi Arabia to make up any global shortfall and an admission that the estimates of Libyan output had been unduly pessimistic allowed a relief rally in the later part of the week.


For the Loonie in particular, the lessening of that nervousness allowed it to profit from the high oil price. There were precious few Canadian economic statistics, just December's retail sales. They were not very helpful, falling by -0.2% on the month and up by just 0.6% on the year.


The coming week will deliver another two dismal and unhelpful UK house price indices together with three purchasing managers' indices - for the manufacturing, construction and services sectors - which might be less damaging. There will a be a purchasing managers' index from Canada too, as well as fourth quarter GDP and Tuesday's Bank of Canada policy decision which is expected to leave the target rate unchanged at 1.0%


Last week has changed nothing for sterling's relationship with the Canadian dollar. It is still in the four-cent-wide channel that has held it for six weeks and ends the month almost unchanged from its position at the end of January.