Base rate cut does Sterling no favours
- Strong Canadian data
- G7 ministers in pessimistic mood

Sterling made it as far as $1.98 on Monday, and again on Tuesday, before taking to its heels. It tested $1.96 on Wednesday and Thursday, finally breaking sharply lower on Friday to bottom out at $1.9350. By the time London opened this morning the Pound had recovered to touch $1.95 but it didn't seem to be going anywhere. Against the US Dollar the Loonie spent the week trading either side of parity.

Last week's market was typified by strange reactions to odd figures and events. For Sterling the first of these was the Halifax house price index. It had been expected to fall and it didn't. Yet there was no relief rally for the Pound. A surprise improvement in the UK services sector Purchasing Managers' Index helped Sterling against the Euro but did it little permanent good on other fronts.

The Monetary Policy Committee did what most people expected on Thursday, lowering the Bank rate by 25 basis points to 5.25 per cent. Given that a significant minority of analysts had been looking for a 50 basis point cut it would have been reasonable to expect a post-decision rally, on the basis of "sell the mystery, but the history." There was none to speak of.

The weekend brought the G7 meeting in Tokyo, attended by finance ministers and central bank heads. The main surprise - if you can call it that - from the meeting was an almost universal pessimism among individual delegates. Italy's economic minister described "a climate of much greater pessimism and worry." The German finance warned that the fallout from US sub-prime mortgage write-downs could exceed $400 million. The US treasury secretary observed that "financial turmoil is serious and persisting." Almost the only positive note came from Britain's chancellor, who said that Britain was well placed to weather the slowdown and resist inflationary pressures. Investors were sceptical.

The Canadian economic data were almost universally positive. Ivey's PMI jumped more than 7 points to 56.2 in January. Building permits rebounded. Housing starts were up by a fifth. All good stuff but the corn-curer was Friday's jobs report. Employment surged by 46,400 - all full time jobs - and unemployment fell to 5.8 per cent. The employment rate went up to 64 per cent, a record high.

Local analysts expect this buoyancy to keep domestic demand going. That will be necessary to offset the ongoing downward pressure on exports that has been brought about by the strength of the Loonie and by slackening demand to the South.

It is likely that UK and Canadian interest rates will continue to move lower, leaving the yield differential still in Sterling's favour. Nevertheless, buyers of the Canadian Dollar should hedge half their requirements, selling Sterling forward to match expected payment dates. Judicious stop orders should be used to protect against the relapse that is still a possibility.