Last week's UK data were uninspiring but did no great damage. News that the Chinese yuan could strengthen helped SE Asian currencies and the Australian dollar.
It was not quite five-a-day for sterling but the British economy managed to put together the best part of a handful of statistics every day. Monday's economic growth and deficit estimates marked the first outing of the shiny new Office for Budget Responsibility, a triumvirate of economists whose task is not to lie about the country's fiscal position in a way that politicians might be tempted to do. The figures were heartening. Growth projections for the economy in the next couple of years, although lower than those of the Labour government, were credible. It also transpired that Britain's borrowing needs could be smaller than Alistair Darling had feared.
Tuesday's inflation figures came in on the low side of expectations. The consumer price index went up by +3.4% in the year to May, less than the +3.5% analysts had predicted and less still than the previous month's +3.7%. Wednesday's employment data looked good on the surface, with the rate of unemployment ticking down to 7.9% and a 31k reduction in the number of dole claimants. There was also modest excitement at news of 5k more people with a job. However, those 5,000 jobs were among 61k part-time appointments; the number of full-time jobs fell by 56k. More than a million people are in part-time positions because they cannot find full-time work.
Thursday's retail sales data provided another interesting social comment. Sales were +0.6% higher in May but the Office for National Statistics drew attention to the uplift cause by the football world cup. There was concern that the footy-related sales (shirts, St George's flags with 'ENGLAND' across the middle of them, television sets) would mean an upturn in British imports and further deterioration of the trade balance. Friday's money supply and public sector borrowing figures showed the number of mortgage approvals still stalled at a low level and another £16 billion of government borrowings in May.
A four-day week in Australia made no appreciable difference to the AUD, in that the week began with the Reserve Bank of Australia's meeting minutes instead of investors spending Monday looking forward to them. The minutes contained no bombshell; rather, the RBA's message was that there would be no change to interest rates until at least August. Whilst conscious of the dangers of a Euroland-inspired austerity slowdown the RBA is more concerned with domestic inflation. A high number in July could yet provoke an August rate increase. Dwelling commencements (housing starts) and Residex's house price index both slowed the pace of their previous increases but maintained what analysts described as 'solid' growth.
At the weekend, news that the People's Bank of China (PBOC) would loosen its hold on the Chinese yuan was positive for the currencies of regional suppliers and trading partners, including the Australian and NZ dollars. The renmimbi has been held at 6.83 yuan to US$1 for nearly two years. Prior to the financial crisis the Chinese authorities had supervised a progressive revaluation that allowed it to strengthen from 8.25 to 6.83 over a period of three years. This latest announcement, that the PBOC will 'strengthen the flexibility' of the exchange rate suggests a resumption of that earlier strategy.
By far the most important event for sterling this week will be Tuesday's budget (or 'emergency' budget as the chancellor chooses to describe it). George Osborne and his colleagues have gone out of the way to manage expectations downwards for this fiscal responsibility fest. Their aim is to make us grateful if we come out of the exercise still able to put food on the table. No doubt it will be a tougher budget than Britons have seen for many a long year. Nor can there be much doubt that a robust show of prudence will help to preserve the country's triple-A credit rating. The worry, however, is that the budget might be so harsh as to undermine investors' confidence in the economic recovery.
We should know by the middle of the week what the market thinks of it all. Until then, there is little point in speculating about Mr Osborne's plans. Buyers of the Australian dollar should go into Tuesday with a 50% hedge of their total requirement and should consider on Wednesday what to do about the balance.
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