Sterling survives another week under the coalition. Yen and dollar leach cash from commodity currencies.

Last Monday's $1.64 starting point was the low of the week. It accelerated upwards to touch a high of $1.7750 on Thursday night before consolidating between $1.7550 and $1.7250. It opened in London this morning at $1.74, an impressive 6% higher on the week.

Britain's new chancellor opened the batting last Monday by revealing a note left on his desk by outgoing Chief Treasury Secretary for his successor David Laws; 'Dear Chief Secretary, I'm afraid there is no money. Kind regards - and good luck! Liam.' Although it was clearly a tongue-in-cheek message Mr Osborne used it to illustrate the parlous state of Britain's finances and it set the tone for a nervous week.

Scheduled economic events came and went without really having much of an impact on sterling. Inflation jumped from 3.4% to 3.7% in April, necessitating the first open letter from the governor of the Bank of England to his new boss. A letter goes to the chancellor if inflation moves below 1% or above 3% and it must be refreshed every three months if inflation is still out of line. As he has said before, the governor believes 'the temporary effects of [oil prices, the rise in VAT and the weak pound] are masking the downward pressure on inflation.' In other words, investors should not hold their breath for a rise in interest rates, a message borne out by the relaxed tone of the minutes of the May Monetary Policy Committee meeting.

Money supply figures on Friday were mildly positive for sterling, with April's public sector borrowing coming in at 10 billion instead of the forecast 11 billion and a downward revision for the March number. But these numbers are not critical for sterling. What the market really wants to see is the chancellor's plan for a wholesale reduction in the size of the country's deficit. Around 6 billion 'savings' are due to be announced on Monday and Tuesday's Queen's Speech will be the death knell for dozens of expensively-staffed qangos. In a month's time the budget will spell out the longer-term strategy for cutting costs and raising taxes. That is when the real fun will start.

For the Australian dollar it started last week. As has become the norm, the direction and velocity of the NZ and Australian dollars owed more to broad risk-appetite among investors than it did to the strengths or weaknesses of those individual currencies. It was the euro zone once again that kicked things off, with Portugal and Spain joining Greece to impose austerity budgets aimed at balancing the books. Together, they increased the risk that southern Europe could slip back into recession as a result of lost jobs and shattered consumer confidence. The killer blow was German Chancellor Merkel's unilateral decision to ban 'short selling' (selling something you don't possess)of European government bonds and shares in the top ten German banks. If Frau Merkel's aim was to reduce volatility in financial markets her move backfired spectacularly. Investors dumped equities and sold emerging market and commodity-related currencies as they headed for the relative safety of the yen and the US dollar.

As for the Australia-specific influences, the minutes of the Reserve Bank of Australia's latest monetary policy meeting confirmed what many had already suspected. The RBA is no longer in a rush to take interest rates higher. After six increases, rates are now 'well placed'. They are looking even more well-placed in the light of the problems of southern Europe. Another negative factor for the Australian dollar was the proposal to tax the profits of mining companies. Rio Tinto, the country's biggest exporter of iron ore, was never going to be the greatest advocate of the idea but its corporate comment that the tax would be 'a wet blanket' on its investment plans in Australia did the AUD no favours.

Regular readers will know what is coming next, and they had better get used to the idea of living with it for another month unless some new and dramatic development suddenly clarifies the hazy outlook for exchange rates: Buyers of the Australian dollar should hedge their exposure. Whether for a one-off real estate purchase or ongoing living costs they should fix a price for half the amount of currency they are going to need. Hedging does not guarantee buying Australian dollars at the best possible price; it guarantees not buying them at the worst.

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