Australian dollar update 02/11/2010

[John from Moneycorp]

STRONGER THAN EXPECTED GDP HELPS STERLING

Britain's economy grew by 0.8% in Q3, postponing or even cancelling the need for more QE

 

Sterling climbed four cents over the course of the week. It began near the low and made four major jumps to a high six cents above its starting point before handing back some of its gains on Friday.

 

The week started with investors in a mood almost of sympathy towards sterling. On Monday they allowed the British Bankers Association to announce the lowest number of approvals in 18 months and the slowest growth in ten years and for mortgage lending. The bears refused to bite. The following morning they even wanted to buy sterling as London opened. It appeared that they were second-guessing the figures for Britain's gross domestic product (GDP) in the third quarter of the year (Q3), speculating that GDP would have expanded more than the 0.4% predicted by analysts.

 

And they were correct to do so; GDP grew by a provisional 0.8% in Q3. The figure was at the very top end of expectations and even the most dyed-in-the-wool pessimists had to admit it was a good one. Sterling headed upwards against everything; it did it no harm that earlier in the day ratings agency Standard & Poor's had confirmed that Britain's AAA credit rating was no longer in doubt, it was "stable". Ratings don't come better than that.

 

For the rest of the week the GDP figure kept the bears at bay. It allowed sterling to avoid the potentially ill effects of a 0.7% fall in Nationwide's house price index, a fall in the CBI's retail sales index and a lacklustre Bank of England total for mortgage approvals in September. A small -0.1% fall in Hometrack's house price index late on Sunday night did no damage either, even though a spokesman said that "further price falls are inevitable".

 

The Australian dollar's main handicap during the week was an inflation figure that was too low for investors' comfort. Analysts had predicted it would have fallen from 3.1% to 2.9% in the third quarter; in fact it fell to 2.7%. The lower inflation level does not prevent the Reserve Bank of Australia taking interest rates higher but it makes a move this week less likely.

 

The other Australian data were tolerable but not particularly supportive. Falling from 0.8% to 0.2% the Conference Board's leading index moved in the wrong direction but was still positive. New home sales went up by 0.6% in September and private sector lending continued to grow very slowly.

 

For the pound the biggest deal this week will be Thursday's Monetary Policy Committee. The MPC is unlikely to make any change to interest rates but it the subject of quantitative easing will inevitably crop up. After last week's stronger than expected GDP figure most analysts expect the MPC to hold its fire on the matter of renewed quantitative easing. However, a "no" vote on Thursday does not guarantee it will not be proposed at future meetings. QE cannot be dismissed as yet.

[Guest Matey2]

And today the interest rate was raised in Australia. I guess that means the slight growth in GDP will be negated next week. sigh.