PRAISE ALL ROUND FOR THE CHANCELLOR
OECD and ratings agency Fitch complimentary about Britain's fiscal programme
G7 intervention gets the Aussie off the hook
In the first four days of the week sterling added six cents. On Friday and over the weekend it had to give back half of that gain.
A big factor in sterling's favour was a statement by ratings agency Fitch that Britain's triple-A credit rating was safe. So laudatory was the statement about the government's superb management of the UK economy that the chancellor's ears would have been glowing if he were the sort of chap to be embarrassed by praise. There would have been blushes later in the week, too, after the Organisation for Economic Co-operation and Development welcomed the chancellor's deficit-reduction efforts. The OECD reckons they have "significantly reduced fiscal risks, contributing to lower bond yield spreads and diminished uncertainty". It believes the current programme "strikes the right balance between addressing fiscal sustainability... and preserving short-term growth" and urges the government to "continue its difficult fiscal consolidation and structural reform programmes to return the economy to a sustainable path".
There was a downside to the OECD report though. Where previously it was forecasting gross domestic product (GDP) to grow by 1.7% in calendar 2011 it now looks for just 1.5% growth. That is appreciably less than the 2.1% floated by the Office for Budgetary Responsibility in November. There was a broader negative too, in the form of nervousness that the disaster in Japan would make an appreciable dent in the global economy. Investors feared that the Monetary Policy Committee might lack the backbone to fight inflation with higher interest rates if there was a new external threat to UK economic growth.
The week's statistics were not a great deal of help to sterling. Wednesday's employment data painted a confusing picture of more people out of work, more people in work and fewer collecting jobseekers' allowance. Investors did not know what to make of it so they did nothing. The number of mortgage approvals in February was as disappointingly low as usual. Nationwide's index of consumer confidence fell to a record low at 38: That sounds less nasty when you realise it has only been going for seven years. Rightmove, the irrepressibly optimistic estate agents' website, reported a third successive month of rising prices. The average seller is now asking £232k, roughly £65k more than the average buyer is ready to spend. There was one genuine note of cheer in Rightmove's survey though; the average time a property is on the market has fallen from 98 to 89 days.
It was the Japanese earthquake and the possible meltdown of the Fukushima power station that drove the Australian dollar lower during the first part of the week. Even had there been any useful Australian economic statistics they would not have mattered. As it was, all investors had to work with was Wednesday's housing starts figure, which was totally unhelpful with a -5.3% fall.
All the commodity currencies were adversely affected by the Japanese disaster. It did not just raise the fear of wider economic fallout that could put the global economy, thus demand for their exports, at risk. There was also fear of real nuclear fallout if one of the reactors were to do a Chernobyl.
The turning point came on Thursday night when G7 finance ministers agreed on a programme of concerted intervention to hold down the yen, which had clocked a record high against the US dollar. The G7 action would not solve the nuclear problem but it did bode well for stability and that, in turn, was a positive omen for "risky" assets such as the Australian dollar.
On this week's list for Australia the only ecostat is the Conference Board's leading index. Sterling has a busier and potentially more eventful week ahead of it. The inflation figures and the minutes of the March MPC meeting will help refine interest rate expectations. The CBI's industrial trends survey and the February retail sales figures will provide a clue as to how the economy is going. The chancellor's budget speech on Wednesday afternoon should include an update of the OBR's growth forecasts but is not expected to include anything that will make people more miserable than they already are.
After a brief upward spike sterling is back within the horizontal channel that has contained it since mid-January.