The USA has at least two major competitive advantages over Europe in restoring economic growth:

• The option of ignoring its external current account deficit (although one day balance will have to be brought back)
• A far less rigid economy than euro zone countries, with their high social charges and rigid labour markets (the Italian general strike has confirmed how difficult it will be to change the latter.

Thus, it seems that the USA is proving able to do what we thought impossible: pull itself out of recession without solving any of its fundamental imbalances (external deficit, private sector and household debt, strong dollar, stock valuations ahead of any earnings-based valuation). To these we can add the internal deficit, now put at $ 46 billion for the current year, with debt reduction delayed indefinitely. What "getting away with it" in the medium term means for the long term is another matter; the politicians have no interest in the long term, anyway.

Nevertheless, the constraints imposed by the imbalances remain and will seriously curtail growth, profitability and inflation. Even if the yield curve does not move, corporations are being forced to borrow longer and to increase financing costs. They may use swaps to shorten again, but only at the cost of paying higher interest later.

The near certitude of the market that the Fed will lift its rate in May has greatly weakened. Inflation is creeping up, but so slowly that the Fed may well choose to ignore it, and prefer to nurse the convalescent economy, with its mixed news of increasing industrial production (not extending to business equipment), declining housing starts, underused industrial capacity (about 75% utilisation) and too much unemployment. Thus it is an extremely difficult "call" as to when Fed rates will be lifted. We originally thought the delay would be well into the second half of the year; now we are inclined to believe it will be before summer, unless the recovery turns out to be a double dip after all.

What will happen to the yield curve if rates are raised? There is no obvious answer. As already mentioned, corporations are being forced to borrow longer as commercial paper is refused them. The US Government will have to borrow, and is likely to prefer short maturities, but the threat of inflation, even modest, has pushed up the long end. Our best estimate at present is that the curve will flatten and that the ten-year yield will not change significantly. This implies that, at last, after several weeks of waiting, a move to bar-belling, may be considered, limited for the moment to dollars.

In Europe inflation is a little under 2.5%, with the UK slightly lower than the euro zone, and unemployment at its lowest for 25 years. However, the reactions of the Central Banks are very different. The BoE, with its target of 2.5%, is perfectly happy about inflation, but concerned about growing household debt, while the ECB, with a ceiling of 2% is profoundly unhappy about inflation and is looking to dampen it by rate rises. It is amazing what a difference Ѕ% makes, as well as "target" versus "ceiling"! We incline to think the ECB policy imposes an unnecessary straitjacket.

We would still expect the BoE to raise rates first, following Canada and New Zealand in moving faster than the Fed, while the ECB should be last to move. Switzerland could go against the trend by lowering interest rates to encourage a weaker franc, but it may suffice to stay on hold while the ECB lifts.

The NTL bail out, assuming it goes through, is extraordinary. A bankruptcy bigger than that of Kirch was in the making, but now the bondholders have become shareholders and the shareholders get almost nothing. Interestingly enough, this UK company has called upon US bankruptcy laws (it is under a Delaware holding) to provide it with legal protection to make the changes. How long for a "Chapter 11" in Europe?

Japan is supposed to be showing signs of economic recovery. A certain hubris is setting in with dismissal of the bond downgrading as the views of "credit rating firms who have lost their credibility since Enron" (Vice Finance Minister). It looks like any excuse to delay serious reform is good enough.

Recommended average maturity for bonds in each currency
Stay short. Be ready for bar-belling in USD (FRN + 2012).

Currencies are still trapped in their well-established, tight trading ranges. Volatilities have reached their lowest levels since the introduction of the euro (1 year at 9%). First quarter results from the US continue to be announced, rather mixed so far and even a bit disappointing on corporate profits. On the other hand, economic figures point to a much stronger recovery in the US than in Europe. Petroleum prices (even with Venezuela) and the metals could not confirm their advances and seriously tested their respective supports. The upcoming G7 meeting this weekend, Alan Greenspan's speech before Congress today and the ongoing peace mission by Colin Powell in the Middle East could provide the trigger to bring fresh initiatives to the financial markets.

EUR/USD: Only a weekly close above 0.8880 or 0.8680 would bring fresh air and encourage the next move of at least 100 to 150 points.

USD/CHF: Despite the unhappiness of the SNB about the strong CHF and their action on short-term interest rates, the U.S. unit has difficulty in sustaining levels above 1.6800. On the downside, movements below 1.6500 remain short-lived.

USD/JPY: Ahead of the G7 meeting this weekend, a slightly stronger yen might be seen in order not to upset the Americans. We still believe that levels below USD/JPY 130.- represent a good buying opportunity . Support is at 130.30, 129,50, 128.60 and upside resistance at 131.50, 132.30, 133.50.

EUR/JPY: The major support zone remains around 114.50/80 and is holding for the time being. The upside is capped by 116.50, 117.20 and 117.80.

USD/CAD: We are keeping our short position USD/CAD at 1.5955, with a S/L at 1.6300. The price objective is still around 1.5650

AUD/USD: Supports have even moved higher and 0.5265 remains key. However, already 0.5310 represents a solid base. The first resistance has been tested at 0.5360, but a weekly close above 0.5380 is needed to see further advances direction 0.5450.

GBP/CHF:As long as the exchange rate stays above 2.3850, the GBP remains well supported and the next targets are 2.4000, followed by 2.4250. Any break below the key support of 2.3850 would reopen the door for 2.3550.