STERLING ON THE RETREAT
Sterling was steady against the Aussie until Wednesday, when it began a downward slide that cost it seven cents over the next 72 hours. When London opened this morning the pound was showing a net loss of six cents on the week.
- UK growth worries increase as hopes of higher interest rates fade
- Kiwi and Aussie dollars lead the commodity currencies' rebound
It was Tuesday's consumer price index (CPI) data that market the turning point for sterling. Up to that point there had been a lingering hope that the Monetary Policy Committee would eventually decide that it must do something about Britain's high inflation rate, especially if it turned out to be as high as the 4.2% analysts were predicting. In the run-up to the CPI announcement many investors took precautionary long positions, buying sterling in the speculation that the figure might be even higher. They turned out to be correct in their supposition but wrong in their assumption that sterling would go up.
CPI rose by 4.4% in the year to February and the pound went down. Initially it fell as those long positions were sold off. The suspicion grew that Bank of England governor Mervyn King would continue to shepherd his MPC along the path of policy relaxation however high the rate of inflation. A day later, the minutes of the March meeting showed that there were indeed still only three members of the committee in favour of an interest rate increase.
Hours after the minutes were published the chancellor of the exchequer delivered his 2011 Budget speech. In it he gave tacit approval to the MPC's stance, saying that inflation of up to 5% this year would fade to 2.5% next year and 2% thereafter. He confirmed that the inflation target remains at 2% but gave no impression that the MPC was under any pressure to achieve it. Also in the speech he delivered the widely-anticipated downgrade to estimates of economic growth; 1.7% for this year, rising to 2.5%, 2.9% and 2.8% in the following three years. Friday's retail sales figures for February rammed home that new reality. After a tolerably successful January Sales season turnover in February was down by -0.8%. It was not a figure calculated to do sterling any favours.
With the economic impact of the Japanese earthquake becoming clearer investors felt less need to pursue a strategy of safety. They moved out of the haven currencies (actually there is only really one haven as long as G7 central banks are sitting on the yen, and that is the Swiss franc) and they moved back into the commodity-oriented and higher yielding "risky" currencies.
The New Zealand dollar was the main beneficiary of that change of mood but the Australian dollar was very close behind. And there is no doubt that it was a change of mood; the Australian economy had but a single piece of statistical evidence to offer; the Conference Board's leading index, which slipped from 0.7% to 0.1%.
A reminder of Britain's struggling economy will come on Tuesday with the revision to fourth quarter GDP growth, previously estimated at -0.6%. House price indices from Nationwide and the Halifax are pencilled in for the end of the week and are unlikely to deliver any positive surprises. Australian data are more plentiful this week than they were last but can still not be described as prolific. There are new home sales, private sector lending, building permits and the AiG performance of manufacturing index (the purchasing managers' index with another name).
In a single week sterling spiked up from its two-month-old horizontal channel then down and out of it. The pound is now pointing at the all-time low it clocked at the turn of the year, with little to stand in its way. Buyers of the Australian dollar should continue to hedge their risk with a forward purchase of half the money they will intend to buy. Those who will need the money soon should buy all of it at current levels.