John from Moneycorp

The Pound vs Australian dollar

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    Having borne the brunt of the British publics shock decision to sever ties with the EU following the announcement of the referendum result on 24th June, the pound has delivered a stellar performance this week; strengthening by an average of 3.5% against the other dozen most actively-traded currencies.

     

    It achieved this after an unexpectedly swift resolution to the leadership campaign on Monday was followed by the Bank of England’s surprise decision to leave its 0.5% Bank Rate unchanged yesterday

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    IMF sharply downgrades UK's growth forecast

    The pound was dealt its latest post Brexit blow yesterday when the International Monetary Fund published its world economic update. Having downgraded its forecasts for global growth this year and next by 0.1 percentage points, to 3.1% and 3.4% respectively, the Fund’s biggest revision was – unsurprisingly – applied to the UK economy; cutting the 2016 forecast by 0.2 percentage points to 1.7%, before slashing it dramatically by 0.9 percentage points to 1.3% in 2017. Investors were subsequently compelled to sell the pound against the US dollar as Brexit fuelled economic uncertainty intensified.

     

    UK unemployment rate falls to 11-year low

    The UK unemployment rate has fallen to 4.9%, the lowest since July 2005. The unemployment total fell by 54,000 to 1.65 million in the three months to May, 201,000 less than a year earlier and the lowest level since spring 2008. The number of people in work rose by 176,000, while the employment rate remains at a record high of 74.4%. However, with investors well aware that these positive figures relate to a time prior to the Brexit vote, the pound has gained little strength from their release.

     

    Looking ahead

    Australian business confidence data is released this evening. Tomorrow sees the release of UK retail sales figures, before the European Central Bank President delivers his latest press conference.

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    The Australian and NZ dollars were both left in the dust by the Japanese yen but in second and third place they were well ahead of the other major currencies. The Aussie had to settle for bronze, strengthening by nearly two cents against sterling and adding half a US cent. Success did not come easily: the Aussie went onto the retreat on Tuesday and Wednesday before getting back into the saddle on Wednesday. Its performance was dictated by external factors: the only Australian ecostats were Wednesdays inflation data, in which the Reserve Bank of Australia's "trimmed mean" was unchanged at 1.7%.

     

    The external factor in Britain was last Friday's purchasing managers' index readings, which showed a slowdown in activity across the private sector and increased the likelihood of an interest rate cut by the Bank of England in August. In the States it was the Federal Reserve, whose monetary policy statement gave no sign of any urgency to increase rates.

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    The monthly currency review is below.

     

    After nearly a week of counting the incumbent prime minister Malcolm Turnbull looked likely to hold onto his job but with only a slender majority. Leaving him less able to drive through the deficit-reduction measures the country needs and because of that Standard & Poor's put Australia's AAA credit rating on negative watch.

     

    Eight days after Australia’s general election ended in uncertainty, the prime minister finally claimed victory for his conservative coalition, bringing an end to the country’s political paralysis - at least for the moment.

    Employment data were helpful to the Aussie, with the addition of 8k jobs in June and a big swing from part-time to full-time working.

     

    The attempted coup d'état in Turkey took place just in time for the New York FX market to react to it. Investors' instant reaction was to offload anything commodity-related and stock up with safe-haven US dollars and Japanese yen. The Aussie retreated as a result: down by a cent on the week against sterling and wearing a loss of one and a half US cents. The Aussie received no help whatsoever from a downgrade by the International Monetary Fund of its global growth forecast.

     

    Nor did the Reserve Bank of Australia come to the Aussie's aid when it published the minutes of its last board meeting. The final sentence gave every impression that the board has a rate cut at the back of its mind.

    Success did not come easily to the currency in the latter part of July, with its performance dictated by external factors: the only Australian ecostats were inflation data, in which the Reserve Bank of Australia's "trimmed mean" was unchanged at 1.7%. The external factor in Britain was the purchasing managers' index readings, which showed a slowdown in activity across the private sector and increased the likelihood of an interest rate cut by the Bank of England in August. In the States it was the Federal Reserve, whose monetary policy statement gave no sign of any urgency to increase rates.

     

    Investor attention quickly turned to the start of August when the Reserve Bank of Australia was widely expected to reduce interest rates to a record low, after a recent run of weak inflation numbers.

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    Australian Dollar review is below, thanks.

     

    Commodity-related currencies in general were helped by softer-than-expected economic data from the United States. The number of jobs created in August was fewer than forecast and a survey of services sector businesses found their activity slowing over the same month.

     

    Eight days of gains for the Aussie came to a messy end on Friday 2nd, apparently as a result of an interview that Glenn Stevens, the outgoing Reserve Bank of Australia governor, gave to the Australian Financial Review. His comment that the Australian dollar "could give us trouble" was interpreted as a hint that it was too strong.

     

    In common with most emerging market and commodity-related currencies the Aussie was undermined by a suspicion that central banks in Japan and Germany are coming under political pressure to rethink their aggressive quantitative easing activities, which have flooded the world with ultra-cheap money for several years.

     

    Australian job stats were inconclusive, insofar as they showed both a loss of jobs in August and a fall in the rate of unemployment. Ecostats from the UK were broadly positive but not sufficiently so to enthuse new buyers of the pound. In the States a fall in retail sales further lessened the likelihood of an interest rate increase by the Federal Reserve in September. In the end the Aussie lost one and a quarter US cents and was down by a cent and three quarters against sterling.

    After losing out to the NZ dollar for more than a month the Aussie turned a corner and strengthened by 2% in the middle part of the month. It was mainly interest rates that accounted for the move. The Reserve Bank of Australia board minutes seemed to dismiss the possibility of any further interest rate cuts while a statement by the Reserve Bank of New Zealand said "further easing will be required" if the economy needs it.

     

    Meanwhile the pound was under pressure from the prospect of its own rate cut and it was taking flak from a step-up in the rhetoric surround Britain's exit from the EU. The chancellor does not believe the country can remain in the single market and talk of a "hard Brexit" worried investors. The Aussie put in one of the best performances against sterling, picking up more than five cents. It also added a little over one US cent.

     

    A lack of significant domestic economic data meant the main driver for the Aussie at the end of the month was investors' appetite for risk, which blew hot and cold. Ahead of the first US presidential candidates' debate they were nervous that Donald Trump was in the lead, with all that implies for international relations and trade: after it they were more relaxed. OPEC's surprise announcement of a cap on oil production was vaguely helpful to risk-appetite while grumbling concerns about Deutsche Bank were not.

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    With a lot of Brexit speculation and talk around the subjet, this has clearly had a negative impact on the pound making it weaker. Last week there was a big drop in the rate.

     

    This week, the Aussie home loans data came out negatively however hasn’t affected the Australian dollar too much yet.

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    Carney and the QIR

     

     

    Fresh from the declaration of his ongoing commitment to Brexit Britain the governor of the Bank of England will today present the bank's quarterly Inflation Report. Mark Carney might also have to justify a lower Bank Rate and increased asset purchases but most analysts think that unlikely.

     

     

    Recent UK economic data have been punchier than feared by some economists following the EU referendum. Whilst the governor did hint at a second rate cut this year investors would be surprised to see one today, given the weakness of sterling. What investors will get, either way, is his spin on the bank's forecasts for growth and inflation. Dr Carney is unlikely to talk up the pound.

     

     

    Two other sterling-sensitive events today are the high court's verdict on the execution of Article 50 and the purchasing managers' index for Britain's services sector. The Article 50 decision will be appealed whichever way it goes.

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    A 13% plunge in the value of the Mexican peso and a 5% decline in Japanese equity prices appeared to show investors were not fully prepared for a Donald Trump win.

     

    Investors initial reactions included selling equities, selling commodity-related and emerging-market currencies. Nobody knows quite what a Trump presidency will mean for the global economy, let alone for currency and capital markets, but many fear it will have negative implications.

     

    The GBP/AUD exchange rate has remained relatively stable for most of the day.

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    After a cracking day last Wednesday, which the chancellor's Autumn Statement did nothing to spoil, sterling wallowed through Thanksgiving and floundered on Black Friday. Just as the pound's gains in the middle of last week owed little to the ecostats, neither did its losses at the end.

     

    The only UK statistic on Thursday was the narrow BBA mortgage approvals figure, which rose for a second successive month to just shy of 40k. No issues there, then. And Friday's numbers were good, in that they all matched or exceeded forecast. The second stab at third quarter gross domestic product left quarterly growth unchanged at 0.5% with business investment rising by 0.9%; more than expected. Retail sales were strong in November, with the CBI's Distributive Trades Survey indicating a 26% monthly increase.

     

    Yet sterling still lost some ground against the Australian dollar.

     

    Still relatively strong overall the Australian dollar is benefiting from higher bulk commodity prices, particularly iron ore which is the nation’s largest export item.

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    Another day and another Brexit story.

     

    This time, the story was about a new legal challenge that seeks to separate Britain's membership of the EU from its participation in the European Economic Area. It weakened the pound a little.

     

    In reality, the pound's fall owed more to profit-taking than to Brexit or any other fundamental economic factor. Sterling has been - and remains - the top performer over the last month, strengthening by an average of 3.8%. With gains of that scale in hand, a decent-sized order to sell sterling - or even the rumour of one - would have been enough to encourage investors to take some profit or at least to pull back their bids.

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    Monthly currency review is below – thanks.

     

    It was a totally average month for the Australian dollar. It weakened by 5.1% against the all-conquering British Pound, exactly the proportion by which, on average, the other dozen most actively-traded currencies fell. The Aussie faded by 0.5% against the NZ Dollar and it was down by a rather more significant 3% against the US Dollar.

     

    Political and economic developments in Australia were more than a little overshadowed by the goings-on elsewhere. America's presidential election delivered a result which, in terms of its surprise value, exceeded even Britain's vote to leave the EU. Investors' initially-negative thoughts on the matter quickly turned positive when they considered where his policies might lead. Tax cuts and increased spending on infrastructure, should they materialise, would logically mean greater government borrowing, higher spending, accelerating inflation and rising interest rates. The market decided that Mr Trump would be good for the US Dollar and they bought it enthusiastically.

     

    However, there was even more enthusiasm for the British Pound once Brexit-fatigue set in. Investors tired of selling Sterling simply on the back of rumour and guesswork. Whether Britain's departure from the EU will be good or bad for the economy remains an open question but, until the structure of that divorce becomes known, it is impossible for investors to make a considered judgment. Between Referendum Eve and the beginning of November the Pound fell by an average of 15.4%, losing 17.6% to the Aussie. In the last month it has recovered nearly a third of that loss as it seems speculative sellers have run out of reasons to carry on.

     

    The two worries for the Australian Dollar are interest rates and credit ratings. Former Liberal Party leader John Hewson, who also had a stint as an economist at the Reserve Bank of Australia, maintains that Australia will lose its AAA credit rating. He told Sky News that "The fact that we are going to lose the triple-A credit rating is a foregone conclusion; it's just a question of timing." Higher coal prices are helping but the government's budget has been in deficit since 2008 and Treasurer Scott Morrison does not see the gap being closed until at least 2021.

     

    At the same time there is renewed talk of RBA rate cuts. In the coming week the central bank will announce its monetary policy decision 24 hours ahead of the figures for third quarter gross domestic product. Whilst that chronology does not point to an immediate cut, GDP weakness could tilt the RBA towards consideration of the idea in the New Year. Less-than-perfect credit ratings and lower interest rates would be a clear threat to the value of the Australian Dollar.

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    The financial new year got off to an upbeat start on Tuesday with share prices mostly higher and economic data around the world painting a generally positive picture. Currency movements were modest: the US and Australian dollars vied for the lead and Sterling was on average unchanged.

    Brexit shuffle

     

    Investors were unsettled by the resignation of Ivan Rogers, Britain's senior representative to the EU. Both he and his deputy will be leaving shortly before the government invokes the Article 50 process of leaving the EU. The inference is that his replacement will be more inclined to negotiate a "hard" Brexit.

     

    Rightly or wrongly the market consensus is that a "hard" Brexit, a complete break with Europe including departure from the single market, would be more hurtful to the UK economy than a "soft" Brexit, which would leave the country in roughly the same situation as Switzerland and Norway. The harder it promises to be, the harder investors are on the Pound.

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    Sterling choppy despite FTSE gains

     

    The FTSE 100 has started 2017 at rapid pace and set a new intraday record high yesterday as the UK services sector saw its fastest growth since 2015 and exceeded expectations. Coupled with strong domestic sales witnessed by manufacturing firms, forecasts for Q4 GDP are that it could come in close to 0.5 percent, similar to the previous quarters in 2016, maintaining the resilience of the post referendum economy in the UK.

     

    It remains to be seen how manufacturing firms cope with pricing into 2017 as margins continue to be squeezed by the rising cost of materials. In addition UK retailer Next prompted UK retail sector shares to slump as they slashed profit forecasts for the current financial year.

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    After Tuesday's strong performance it would not have been a surprise to see sterling giving back some of its gains yesterday. It didn't happen. The pound was, on average, unchanged on the day after the UK employment data left it unmoved.

     

    There was nothing at all wrong with the jobs numbers. Unemployment was steady at 4.8%, its lowest level since the global financial crisis. Jobseeker claims were down by -10k, having been expected to increase. Average earnings were up by an annual 2.8%, beating the 2.5% rise in the retail price index and the CPI's 1.6%.

     

    Investors were not overjoyed by the figures: the pound showed no reaction whatsoever. But the data were good enough to ensure that sterling held onto the advantage it had gleaned on Tuesday.

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    Weekly update below – have a good weekend all.

     

    Although sterling was the undisputed leader of the major currency pack the antipodean dollars were not far behind. The Australian dollar took third place, losing four fifths of a cent to sterling and strengthening by four fifths of a US cent. E

     

    Economic data from Australia were vaguely supportive but not overwhelmingly so. Mortgage lending was respectable, consumer confidence inched higher and unemployment ticked up to 5.8% in December despite the addition of 13.5k jobs.

     

    The UK ecostats for inflation and employment were decent enough but it was the Prime Minister's Brexit speech that took sterling ahead. Its main points had been leaked the previous evening so investors were not shocked to hear that there would be a clean break - otherwise known as a hard Brexit. They were actively pleased to learn that there would be a transitional period and that parliament will have a vote on whatever deal is agreed with the EU.

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    Pugnacious pound

     

    Despite a disappointing set of UK retail sales figures the pound is a touch higher, on average, than Friday's opening levels.

     

    Not even the merest glint of light was to be found among the retail sales data for December. Sales were down by -1.9% on the month and November's feeble increase was downwardly revised to -0.1%. Analysts are at a loss to explain the fall, other than to speculate that consumers had brought forward their Christmas purchases to Black Friday in November.

     

    Back to Brexit

     

    The focus of investors will turn this week from Trumpton to Westminster. Tomorrow at 0930am (UK time) the Supreme Court will deliver its judgment as to whether or not parliament must approve the activation of Article 50, the process of leaving the EU. On Friday the prime minister visits the new US president.

     

    The word on the street is that the Supreme Court will rule in favour of the plaintiffs and that there will have to be a vote on Article 50. Recent experience suggests that would be positive for the pound, in that it would increase the (exceedingly slim) chance of Britain remaining within the EU.

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    The British prime minister's visits to the United States and Turkey and the US president's Muslim travel ban have made surprisingly little difference to exchange rates. Compared with Friday morning the pound is just about unchanged against the dollar, the lira and the other dozen most actively-traded currencies.

     

    GDP

    Provisional figures on Thursday for fourth quarter growth indicated a 0.6% expansion of Britain's gross domestic product in the fourth quarter of 2016. The UK number was a tick higher than expected.

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    Yesterday, the UK Parliament took the expected step further towards activating Article 50 when the House of Commons signed off the Brexit bill to the upper house.

     

    Not much is happening at the moment, data wise, to move the exchange rate considerably - the UK production and trade figures come out tomorrow.

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    Yesterday, Nicola Sturgeon (First Minister of Scotland) announced plans to trigger second independence referendum on Scotland's membership of the United Kingdom.

     

    There was an expectation this could weaken the pound but we’ve only seen minor moves so far.

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