Australian dollar update 07/09/2010

[John from Moneycorp]

TRICKLE OF WEAK DATA WEIGHS ON STERLING

• Purchasing managers' indices and house prices falling
  
• Investors embrace the Australian dollar as they desert the US dollar
  

A generally uncomfortable four-day week for sterling saw it lose four and a half Australian cents and left it facing further damage when London opened this morning.

 

The pound was dogged by disappointing economic data throughout the week. None was outrageously bad but the trickle feed of mediocrity had a depressing effect on sterling. Perhaps the best figure was the four-point improvement in consumer confidence GfK's measure) that kicked off the week. It improved from -22 to -18. Still negative, granted, but heading in the right direction. Unfortunately the market was not impressed; it set more store by the dreary mortgage and personal lending numbers later on Tuesday. There was no chance that investors would be overjoyed by the pathetic 160 increase in the number of mortgages approved in July. Nor were they smitten by Nationwide's house price index which fell again August, this time by -0.9%.

 

Wednesday's banana skin was the manufacturing sector purchasing managers' index (PMI), which measures (by calculation; it is not an opinion-driven survey) activity across a commercial sector. Including a downward revision to the previous figure the index for August was three points down on the month at 54.3. Against the equivalent numbers from Europe and the States it looked weak. There was more of the same on Thursday with a 52.1 reading for the construction sector PMI and on Friday when the services PMI came in at 51.3. Both had lost a couple of points on the month. If they go below 50.0 it will mean activity is shrinking, not just glowing more slowly.

 

A heartening piece of news for Britain, if not for sterling itself, was the three-yearly survey of foreign exchange activity by the Bank for International Settlements (BIS). London has extended its mastery of global FX, handling 37% of all activity. It is more than double the 18% accounted for by the United States (New York and Chicago). No other country makes it into double figures. Paris and Frankfurt together do less business than Singapore.

 

As well as an impressive 1.2% quarterly expansion of gross domestic product the Lucky Nation was able to reveal a 19% increase in company profits in the second quarter of the year. Inventories were down by -0.5%, possibly a sign of fading confidence but equally possibly an indication that orders are running ahead of production. More good news came with a 2.3% increase in dwelling approvals after three months of decline that saw them cut by a fifth. Retail sales, too, were ahead of forecast with 0.7% monthly growth in July; nearly 100% better growth than the market had been looking for. The trade balance for July was also better than forecast with a $6.5 billion surplus, miles better than the previous $3.2 billion deficit. In value terms exports rose by $21% while imports were up by less than 5%. The terms of trade helped, improving by 12.5%.

 

Beyond the domestic Australian developments investors were also interested in pursuing Friday's US employment report and in a general perception that things might not be as bad as they seemed for the global economy. On the world stage the smaller-than-expected loss of US jobs in July, a net -54k people instead of the expected -76k over two months, led to investors dumping safe-haven yen, Swiss francs and US dollars and rushing back to take advantage of the higher yields available from the commodity- and growth-related currencies.

 

A North American holiday today (Labor Day) and a relative shortage of interesting data leave investors with not much to provide guidance this week. UK industrial production should have risen in July and with a bit of luck the weak pound might at last be serving to narrow Britain's trade deficit. Thursday's meeting of the London Monetary Policy Committee (MPC) is highly unlikely to result in any change to interest rates. Neither is the Reserve Bank of Australia going to shift its Cash Rate, at least as far as most analysts are concerned. That does not mean investors will sit on their hands and do nothing. On Monday morning they seemed to be teed up to give sterling another whack. Buyers of the Australian dollar should use a forward transaction to fix a price for half the currency they expect to need and take advantage of any sterling spikes to improve their average.