There were mainly 2 stories in FX markets during the 3rd quarter. One was broad-based dollar weakness due to a housing crisis & lower interest rates in the U.S. The 2nd theme was leadership by currencies that stand to benefit from acceleration in global growth. In this regard the best performers were commodity currencies, such as our rand, the Australian & Canadian dollar & Brazilian real. As far as the G-7 currencies were concerned, the euro rallied by 5.2%, sterling 1.8% and the yen 7.4% resulting in the trade weighted US$ Index falling to its lowest level since inception in 1973. In rand terms the fund fell 2% during the period under review on the back of a 2.6% appreciation of the local unit.

Looking ahead we believe our record current account deficit will weigh on the rand; however in the short term flows on the capital account are offsetting this. Against the crosses traders remain underweight the dollar on the grounds that US monetary policy has become relatively accommodative vs Europe & Japan. The trend of "dollar diversification" from global central banks is also a head wind. We believe the Fed would rather risk cutting rates too much than too little so further cuts are probably on the cards & would be another head wind for the dollar.

Concerns' surrounding the sub-prime sector & the potential effects it might have on the rest of the economy is also negative as the growth differential between the US & the east will widen further. The big risk with the above is the recent depreciation of the greenback to some extent reflects this and the dollar could be supported by an improving trade deficit thanks to the consumption slowdown. The trade weighted dollar is also now considered to be about 20% undervalued on a PPP basis so its no surprise consensus currency forecasts 12 months out are calling for a strengthening dollar (USD/EUR=1.36) & weaker rand (ZAR/USD=7.34). We recommend being diversified between the crosses as technical's currently favour Sterling & the Euro but valuation supports the Dollar. The gross simple yield of the underlying holdings is now 4.7% providing a positive real yield of 2.6%. The weighted average maturity having risen to 45 days and all underlying instruments remain AAA rated by Moody's. There was no exposure to the sub prime market.

The rand started the year where it left off, being the worst performing primary currency in the world, as it declined 4.2% against the dollar inQ1. Over 12 months it has now lost 15.7%, as a result of emergingmarket jitters during the middle of 2006, our record current account deficit & fears of a global slowdown affecting commodity currencies. Clearly currency weakness helped the portfolio, resulting in it performing well in rand terms during the period under review and 20.7% over 12 months.

At the moment technicals favour sterling & the euro, but valuation (PPP) supports the dollar. Consensus currency forecasts 12 months out also seem to point to a strengthening dollar against the crosses, coupled with a weaker rand (USD/GBP=1.89, ZAR/USD=7.45 USD/EUR=1.32). We think the greenback should be supported by an improving trade deficit, which seems to be stabilising thanks to the consumption slowdown. Conversely, headwinds include the Fed shifting away from its tightening bias (cutting rates would be dollar negative) & the world has "decoupled" from its reliance on US growth. The global economy is now characterised by a slowing US, with Europe surprising on the upside & Japan gaining traction.

Selling pressure from central banks that are diversifying their reserves from predominantly dollars to a basket of currencies is also clearly negative. Looking ahead, STANLIB's view is the Fed has completed its tightening cycle after hiking rates 17 times by 25bps in consecutivemeetings from 1%- 5.25%. Forwards also indicate we are near the peak of the current cycle, although we think rates will be kept on hold for longer before declining near year end. As such, the portfolio still provides a positive real yield of over 2%. All underlying instruments remain AAA rated byMoody's with theweighted average maturity having risen to over 40 days.

The rand ended the year as the worst performing primary currency in the world declining 9.3% against the dollar. Emerging market jitters during the middle of the year, our record current account deficit & fears of a global slowdown affecting commodity currencies all contributed to the rands fall. The fund was also assisted by the Fed maintaining rates at 5.25% resulting in a positive real yield of 2.8%. All underlying instruments remain AAA rated by Moody's with the weighted average maturity having risen to over 40 days as the Fed is probably at the end of its tightening cycle.

Looking ahead risks to the dollar include selling pressure from central banks diversifying their reserves, converging growth rates where the global economy is no longer solely dependant on theUS aswell as technical's,which are not in its favour. Conversely improving sentiment towards a better budget & trade deficit as well as a bout of risk-reduction causing a flight to quality (with the greenback being the obvious beneficiary) could result in dollar strength. Consensus currency forecasts put the greenback at $1.32/EUR 12 months out