STERLING? WHAT GOOD BITS?
Events conspire against sterling despite IMF endorsement. For the AUD it all depends on the RBA statement.
A three-cent range began the week at the top and ended at the bottom. As luck would have it, the pound opened in London this morning in the middle of it, a cent and a half lower on the seven days.
To begin with, everything looked fine for the pound. It received a ringing endorsement from the International Monetary Fund, which was almost effusive in its praise of the coalition government's fiscal prudence. The IMF said Britain's recovery was "under way" and believed policy was "appropriately ambitious" and that "fiscal tightening will dampen short-term growth but not stop it..." The following day there was confirmation that the UK economy grew by 1.2% in the second quarter of the year.
But then it all got messy. Charles Bean, deputy governor of the Bank of England and formerly the Bank's chief economist, told Channel 4 news that "what we're trying to do by our [monetary] policy is encourage more spending." Ooh er, a central banker advocating consumption over thrift. That is not something you hear very often; he must be worried. And his colleague on the Monetary Policy Committee certainly was. Adam Posen sided with Mr Bean's exhortation to spend, spend, spend. He summarised a speech in Kingston by saying that "a great deal of unconventional monetary stimulus will be needed". He was in no doubt that the MPC should commit to another round of quantitative easing (QE).
There was little or no help from the rest of the week's economic data. Mortgage applications, consumer confidence, bank lending and almost every other salient statistic were either down on the month, lower than expected or both. The outcome of all this for sterling was 12th place in the ranking of the world's top dozen (most actively-traded) currencies.
A scattershot of Australian statistics almost grouped the Conference Board's leading index, new home sales, building permits, private sector credit and the performance of manufacturing index. There was no chance of putting together a comprehensive economic picture from that lot so investors made of it what they could. Dwelling approvals fell by a disappointing -4.7% in August and the (market) value of the projects involved continued its downward trend at roughly -2% a month. Private sector credit brought another unimpressive result with growth of just 0.1% in August. It might be just a temporary phenomenon but three-monthly credit growth is running at its slowest for a year.
The Reserve Bank of Australia's monetary policy meeting overshadowed the week, with analysts competing to justify their predictions that the RBA would lift the cash rate by 25 basis points to 4.75%. Having agreed that the RBA would indeed deliver the predicted increase this month, the fight has moved on to cover the RBA's next decision on 2 November.
Following the RBA decision the main exhibit this week will be the Bank of England's monetary policy decision on Thursday. Interest rates will not change but there may be something in the statement that mentions renewed asset purchases (quantitative easing).