Chris Redfern: South African setbacks

By far the weakest link last week in the world of currency was the South African rand.

It suffered two setbacks, the first caused by news that South Africa's economy shrank by -0.6 per cent in the first quarter of the year, and the second by an unexpectedly large trade deficit in March.

There was not much to choose between the leaders. Just a quarter of a cent separated the US dollar in first place and the euro in seventh.

The American currency's class-leading performance came despite news that the US economy shrank by a revised -0.25 per cent in the first quarter.

Investors gave it the benefit of the doubt because of the awful weather early in the year. They expect an economic rebound in Q2.

The pound's mediocre result was only partly the result of weaker than expected data for UK mortgage approvals and retail sales.

The initial sell-off on Wednesday morning was simply an attempt by punter or punters unknown to push sterling below the upward trend-line which had supported it against the US dollar since the end of August. The effort was successful but follow-through was limited and there was no collapse.

The elephant in the room was the euro. More specifically it was the European Central Bank's policy discussion which will take place this Thursday (5 June).

Investors believe the ECB is ready, at long last, to address the problem of persistently low inflation.

They expect some sort of interest rate cut but they cannot be sure what else - if anything - the ECB will do.

That lack of certainty means they are cautious about making big bets for or against the euro ahead of the event, especially as the ECB has more than once surprised them by doing nothing when it was expected to take decisive action.