Australian dollar update 14/09/2010

[John from Moneycorp]

STERLING STRUGGLES AS INVESTORS EMBRACE RISK

 

Bank holds UK interest rates steady at 0.5% for a 19th month

Australian employers add 31,000 staff in August.

 

For the first half of the week sterling was resilient. On Wednesday morning it was unchanged from Monday. The following two days were a different proposition. The pound dropped two and a half cents.

 

The flavour of the week was that the major currencies went, in the end, nowhere; only the commodity-related currencies had anything to say. According to Reuters, the sharp drop for sterling on Monday was allegedly the result of 'heavy selling by a UK clearing bank... related to the UK's contribution to the European Union's agricultural budget.' It was certainly nothing to do with any economic news. The British Retail Consortium's Retail Sales Monitor had showed like-for-like sales in August to be 1% ahead of those for the same month last year and double the previous month's 0.5% July-July increase but it was not exactly stirring stuff.

 

More useful was Wednesday's Halifax house price index. It rose by 0.2% in August. Even though the annual rate of increase slowed from 4.9% to 4.6% the monthly rise was much more palatable than the half per cent fall investors had been expecting. Sterling jumped sharply on the news. But that was about the top and bottom of it as far as positive UK economic news was concerned. Industrial production rose by 0.3% - more slowly than expected - in July and Thursday's trade deficit (for July) was an unwanted record. Friday's producer price index (PPI) data had manufacturers' costs rising by 8.1% in the year to August while factory gate prices went up by just 4.7% over the same 12 months; a further squeezing of margins.

 

The irrelevance of the Bank of England's Bank Rate to the wider economy was highlighted on Thursday. As the Bank kept its key policy interest rate at 0.5% for a 19th month the news papers wailed about the real cost of borrowing. The average high street bank overdraft interest rate went up to 19.1%, its highest level since records began in 1995. The five most expensive overdraft lenders were all government subsidiaries and top of the tree was NatWest (RBS) at 19.89%.

 

The Reserve Bank of Australia announced, as expected, that it would hold its Cash Rate steady at 4.5%. Less predictable was the same day's revelation that two of the three independent Australian MPs would side with incumbent prime minister Julia Gillard in a coalition government. The RBA decision sent the Aussie lower and the first signs were that the return of a Labour government would do the same, if only because of the vanishingly small majority.

 

Thursday's employment data solved that problem. Employment went up by 31k in August after rising by 25k in July. That was good enough but the breakdown was even better: the number of part-time employees went down by -22k but there were 53k more full time staff. The icing on the cake was a fall in the unemployment rate from 5.3% to 5.1%.

 

From sterling's point of view the critical figures this week will probably be the employment numbers. Take note also of developments at the TUC conference in Manchester: If the unions really are intent on attacking the government through strike action, and if the rank-and-file are up for it, sterling will be under pressure. It is not so yet; investors are not convinced that workers will put politics above self-interest, but the possibility is now on the radar.