Happy New Year everyone.


It might be a fluke but so far so good. UK manufacturers still optimistic. Aussie dollar finds itself unexpectedly underwater.

An expensive festive season cost the pound a net three cents. It could have been worse. On Monday, while Britain was celebrating New Year’s Day, it was five cents below pre-Christmas levels.

If this sounds like a rehash of the pre-Christmas sterling apologia, apologies, but the pound was again beset by a series of individually insignificant yet collectively damaging news items. At £22.8 billion, November's UK public sector net borrowing requirement was a third bigger than the expected £16.8 billion and two and a half times the size of the October shortfall. That announcement did not receive a warm reception just a week after the revelation of 33,000 public sector job losses. A day later there was a downward revision to third quarter gross domestic product (GDP) growth. Initially, Q3 growth had been assessed at 0.8%; now it was only 0.7%. Although by no means awful, it was a step in the wrong psychological direction.

House prices remain a major sore that investors cannot help but scratch. Hometrack, a firm providing "information solutions to the UK housing and mortgage industries", recorded another monthly fall in house prices, this time of -1.6% in December after a -1.1% fall in November. The Land Registry, perhaps best-placed to evaluate the entirety of the UK property universe, logged a -0.6% fall for the average house price in November. Nationwide's figure for December was an unexpected tonic that nobody quite trusted; a 0.4% price rise from November to December. Nationwide admitted "it would be premature to suggest that the recent downward trend has been broken on the basis of one month’s figures" but stressed that the situation today is more stable than it was two years ago.

During the last few days of 2010 the pound suffered a couple of reversals, both inexplicable and both later corrected. There are two possible conclusions to be drawn from the sell-offs. First, sizeable orders in a thin market can move the exchange rate disproportionately; second, because both instances involved selling the pound there is an implication that not all the bears are in hibernation this winter.

The Australian dollar did well during the holiday period, taking advantage of investors' renewed appetite for risk and high-yielding currencies. Its winning streak came to an end on Monday. Investors came to the conclusion that the widespread flooding in Queensland would have a serious impact on agricultural production and overall economic output. Their misgivings about the Aussie were intensified when the Australian Industry Group's performance of manufacturing index fell by more than a point in December to 46.3. Anything below 50 indicates a contraction in activity. Although inflationary pressures suggest rising interest rates in the foreseeable future, nervousness about the Australian economy is, for the moment, overriding the usual enthusiasm for higher yields.

Sterling began the New Year on a positive note. Mortgage approvals in November were microscopically higher at 48,000 and, more importantly, the purchasing managers' index (PMI) for the manufacturing sector improved from 57.5 to 58.3. It had been expected to fall, so was a reason for mild celebration. Thursday's services sector PMI is projected to be steady at 53.0 but the Halifax house price index the following day could bring negativity back into the equation.