In this week's update:
Wild swings seen in the sterling Australian dollar currency pair

This currency pair was driven higher in the early part of the week, as global concerns surrounding the Greek sovereign debt crisis persisted and had now, in fact, spread to other southern Mediterranean nations. The euro was sent markedly lower when news broke that the Spanish Central Bank had had to rescue one of the nation’s savings banks, CajaSur, prompting fears that many more Spanish savings institutions would suffer a similar fate. This led to investors dumping Australian dollars for the safety of the US dollar, while sterling managed to hit a high of just above A$1.77, before falling back down to A$1.70 as relative calm was restored to the markets by Thursday.

The pound benefitted from economic data which continues to support the view that the UK recovery is gaining traction and that it is being led by manufacturing and industry, rather than consumer debt – meaning it should prove resilient and sustainable.

Focus at the beginning of the week was on the details of the new Chancellor’s plans for £6.2bn of immediate spending cuts, in advance of the budget next month. The plan not only needed to be credible, it also could not overly hinder economic growth. In the event, the axe fell on quangos and wasteful areas of government, focussing on efficiencies rather than outright cuts (for now) to the general approval of the market.

The main data of the week showed that Gross Domestic Product (GDP) rose 0.3% in Q1, compared to the initial measurement of 0.2%. This was the expected result; however, manufacturing unexpectedly surged 1.2% – the largest gain in activity recorded since the first quarter of 2006. As a result, some analysts have suggested that there may be a further upward revision when the final reading is announced, with another strong figure expected for Q2. However, fiscal tightening is likely to mean the second half of the year will not be as good.

Not all data was positive, as retail sales suffered an unexpected hit in May after shoppers were turned off by poor weather and the biggest price rises in two years. The reading was the largest one-month drop in the index since January 2005. The Confederation of British Industry's quarterly survey, released at the same time, showed the greatest balance of firms reporting planned and actual price rises for two years. This added to inflation fears. Consumer confidence, perhaps unsurprisingly, also dipped as concerns over spending cuts and tax rises caused shoppers to tighten their purse strings. Elsewhere, mortgage approvals were slightly down on expectations, but not enough to hinder the pound.

Global risk appetite did however get a boost when news that China’s foreign exchange regulator affirmed its commitment to investing in Europe, damping concern large investors may flee the eurozone’s common currency. China’s State Administration of Foreign Exchange, or SAFE, which manages China’s $2.4 trillion of foreign exchange reserves (the world’s largest), said in its statement that “the media report that SAFE is reviewing its euro holdings was groundless,” without specifying the media to which it was referring. Later in the day, the Kuwait Investment Authority made a similar statement further boosting the euro. This vote of confidence saw investors flood back to the high yielding Australian dollar, although their appetite was nowhere near as strong as it had been previously only a couple of months ago.

Further signs that the Reserve Bank of Australia’s determined efforts to ensure inflationary pressures are contained – following their sequence of rate hikes since October 2009 – are now feeding through to the real economy. Although construction work did rise by 1.9% during the month of March, this was lower than market expectations. Many economists are now suggesting a more modest growth rate for the first quarter of 2010.

Australian business investment reported an unexpected drop of 0.2% for the first three month of this year. Concerns remain that company spending may continue to slide in the months ahead, following the government’s proposal to impose a 40% tax on mining profits. This ‘super tax’ may see inward investment decline and job creation hindered.

With so many differing factors driving the sterling Australian dollar rate, buyers of dollars should consider hedging their exposure. Whether for a one-off real estate purchase or ongoing living costs, they would be wise to 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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Foreign Exchange since 1979