Australian dollar update 08/02/2011

[John from Moneycorp]

UK INTEREST RATE DECISION THIS WEEK

 

· Probably no rate increase yet but expectations are rising

· Australian interest rates steady for a while longer.

 

Sterling zigzagged higher through the first four days of the week, adding more than five cents. It gave back three cents on Thursday before making most of the loss back on Friday and over the weekend. When London opened this morning the pound was trading five cents above last Monday's starting point. (The Aussie dollar moved above US$1 on Tuesday and spent the rest of the week above par.)

 

Sterling's two bastions of support were the unexpectedly strong UK purchasing managers' indices (PMIs) and ever-louder talk of higher interest rates. PMIs provide a standardised measure of economic activity. They are based on a questionnaire that asks selected companies about such things as output, new orders, stock levels, employment and prices. In Britain they cover the manufacturing, construction and retail sectors. A reading of 50.0 is neutral; above that level business is getting better, below 50 means activity is slowing.

 

Britain's manufacturing PMI has been doing well in recent months. In January a three-point improvement to 62.0 showed it was doing even better. The construction PMI, which had been struggling below 50, went up by more than three and a half points to 53.7. The reading for services was nearly five points higher at 54.5; that result was as unexpectedly good as the previous month's result had been unexpectedly bad at 49.7. The only two other UK ecostats of any consequence were December's typically poor mortgage approvals (42,563) and an unexpected 0.8% monthly rise in the Halifax house price index.

 

The talk of higher interest rates came from three Monetary Policy Committee (MPC) members. Martin Weale wrote in The Guardian newspaper that there is "a compelling case for an increase in the bank rate". Bank of England deputy governor Charlie Bean told the Western Mail that if inflation remains high "we may well have to respond to that by keeping domestically generated inflation lower". Andrew Sentance, the notorious hawk, said in a separate interview that negative growth at the end of last year should not be an obstacle to tighter policy. He repeated his long-standing call for higher interest rates, saying "we need to be prepared to look through fluctuations in GDP growth when we're recovering from recession: growth figures are never linear and smooth in recoveries." The Independent's economics editor even speculated on Monday morning that the first increase could come as soon as this week.

 

It was a slightly different story from Australia. After 12 month during which the Reserve Bank of Australia raised the cash rate by 175 basis points it has kept it steady at 4.75% since November and repeated the exercise at Tuesday's policy meeting. The latest monetary policy statement, published last Friday, suggested it might remain there for a few months more. Whilst the RBA still speaks of a bias towards higher rates, analysts do not reckon there will be any move until the second half of the year and they are not even sure there will be a hike at all.

 

Among the week's steady flow of Australian data, it felt as though half related to real estate. The Bureau of Statistics announced a 0.7% increase for house prices during the last three months of 2010 and an annual rise of 5.8%. Although it was not a big rise it was bigger than the 0% that investors had been expecting and considerably better than the downwardly revised -0.3% fall in the third quarter. New home sales were down by -0.6% in December while building permits were up by a healthy 8.7%. Permits were down by -5.0% compared with a year ago though.

 

The AiG performing of manufacturing and performance of services indices - PMIs by another name - remained unimpressive, stuck in the shrinkage zone below 50. The manufacturing index edged up from 46.3 to 46.7 while the services index fell by a point to 45.5. the construction index was even more dismal, down by nearly four points to 40.2. NAB's index of business confidence dropped from +6 to -3.

 

After Wednesday's trade figures the highlight for sterling this week will be Thursday's MPC policy decision. It could be anti-climactic, given the great likelihood that there will be no change to the 0.5% Bank Rate. But that might not prevent investors second-guessing the voting pattern. If any MPC members offer their opinions to the media they will receive even greater attention than usual. For the Australian dollar this week will be less statistically lively than the last one. Thursday's employment figures will provide the most important pointer.