STERLING WALLOWS IN A DREARY MARKET
For four days the pound loitered in a two and a half cent range, threatening to go nowhere. On Thursday it fell two cents beyond the bottom of that range and carried on lower. When London opened today the pound was two and a half cents lower than its position last Monday morning and within spitting distance of October's all-time low.
- UK manufacturing sector at a 16-year high
- BoE and RBA both expected to leave interest rates unchanged this week.
Sterling found its tedious tone from an unusually short list of what turned out to be mainly uninspiring economic data. Hometrack and Nationwide both reported lower house price in November, Hometrack with a -1.1% fall and Nationwide at -0.3%. Mortgage approvals in October numbered 47,200, little more than half as many as there would be in what used to be known as a "normal" month. UK consumer confidence deteriorated from -19 to -21. Of the week's two purchasing managers' indices (PMIs), one was surprisingly good and the other was a disappointment. Firms in the services sector reported slower expansion, the PMI falling from 53.2 to a still-positive 53.0. The manufacturing sector was a different case entirely, rising by more than there points to 58.0, its highest level in 16 years. Investors pay no obvious attention to either number; the strong manufacturing PMI did not take sterling higher and neither did the poor services figure send it lower.
There was similarly little reaction when the Office for Budgetary Responsibility (OBR) produced an updated set of forecasts for the UK economy. In essence, the OBR recognised that gross domestic product (GDP) has expanded more quickly than expected this year. It has therefore shifted some of next year's growth into this year's bucket on the assumption that, although government spending cuts have not yet bitten as deeply as expected, they will eventually. Accordingly, the OBR has upped its growth forecast for 2010 from 1.2% to 1.8% (which could still turn out to be conservative) and lowered the projections for 2011 from 2.3% to 2.1% and for 2012 from 2.8% to 2.6%. The OBR does not expect to see inflation back down at its 2% target until 2012, when next month's VAT increase and other temporary factors have worked their way through the system.
A reasonably generous sprinkling of Australian economic data did not, in the end, have much impact on the dollar. In October new home sales went up by 2.4%. Building permits rose by 9.3%, more than compensating for the previous month's -5.3% drop but not making much of a dent in an annual decline of -11.6%. AiG's performance of manufacturing index fell two points further into negative territory at 47.6. Retail sales were down by -1.1% in October. Third quarter gross domestic product growth came in at 0.2%, well short of the 0.5% investors had been looking for.
With a grim set of statistics like that one could be forgiven for wondering how the Australian dollar managed to collect gains on almost every front. The answer, bizarrely, is the European Central Bank. With its decision on Thursday to extend the offer of "unlimited liquidity" to Euroland's commercial banks the ECB removed one of the risks that had encouraged investors to seek the security of the safe-haven US dollar and yen. As they leaned back towards risk investors increased their stocks of the commodity-oriented and high-yielding Australian dollar.
The coming week is unusually lacking in salient statistical announcements. On Thursday the Bank of England makes its monthly announcement about monetary policy but it will almost certainly be couched in terms identical to those of the previous ten months. Sterling interest rates will be unchanged and there will be no fresh asset purchases in the quantitative easing programme. The Reserve Bank of Australia will have made its own interest rate decision two days earlier and there, too, no change is expected to the 4.75% cash rate.