John from Moneycorp

The Pound vs Australian dollar

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May (names the) day

 

There was confirmation on Monday that there is no situation in which sterling might find itself that cannot be made worse by the mention of Brexit. Once again it was the prime minister who tossed the grenade when she named 29 March as the day Article 50 will be activated.

 

Investors learned two months ago that Article 50 would be triggered "by the end of March" and 29 March fits very neatly into that calendar slot. So Ms May's pronouncement hardly came as a surprise but investors nevertheless felt obliged to react by marking down the pound.

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UK Retail Sales

 

There has been a surge in the value of sterling against the EURO following the announcement of better than expected UK retail sales in February, which rose 1.4% against a forecast 0.4%. This is a much more positive outcome than the 0.5% decline at the start of the year and signals consumer confidence is increasing despite higher levels of inflation. These new results have pushed the annual rate of retail growth to 3.7% from 1% in January and caused sterling to rebound as analysts have been predicting.

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This news in particular was good for the pound.

 

Pound is currently at strong levels against the Australian dollar - in comparable terms this year (based on what the rate has been in 2017) then now is a good time to be sending money over.

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So if I'm looking at things right, over the last year the exchange rate had pretty much plummeted, but it's now increasing? Do you think that is likely to carry on going up?

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A look back at the end of last week.

Sterling lost an average of -0.4%, partly because of disappointing data for first quarter growth, partly because of opinion polls ahead of next week's general election and partly just because it is out of favour among investors. Its biggest loss was of -1.1% to the Japanese yen.

Thursday's revised figures for gross domestic product in Q1 put quarterly growth at 0.2% rather the 0.3% expansion previously announced. The change came as a surprise and therefore as a disappointment, especially as the downgrade related mainly to consumer spending.  Another concern to investors was the narrowing advantage, reported by opinion pollsters, of the Conservatives over the Labour party. It has fallen from 22 points to 5 in just two weeks.

Other figures already released show Australian building permits increasing by a monthly 4.4%.

Overall, the pound is weaker against the Australian dollar.

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There were two overnight lurches for the Australian dollar. The first was downwards, after the current account deficit for the first quarter came in at $3.1bn instead of flat. The second one, upwards, was the result of the Reserve Bank of Australia's decision to leave its Cash Rate unchanged at 1.5%. They cancelled each other out.

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Not much news coming out of Australia – bit more surrounding the UK.

UK inflation

Consumer and retail price index data put UK inflation higher than the Bank of England's 2%target and they were ahead of analysts' projections. CPI was up by 2.9% on the year and RPI rose by 3.7%. The data helped the pound towards its first winning day since Thursday.

Sterling was already on its way up when the inflation figures came out and they might have given it a little more impetus. However, investors are under no illusion that the Bank of England will take any policy action, given the uncertainty that lies ahead for the UK economy.

As shown by the price action on Friday and Monday, the pound is deep inside don't-know territory. On Monday and Tuesday there was no shortage of economic pundits telling the financial media that the pound has been oversold; driven below levels that can be justified by economic fundamentals. That is not to suppose that it must therefore rebound in the immediate future: Trends like this have a tendency to overshoot.

Spending power

Whether CPI or RPI represents the best barometer of consumer prices, both indices were higher than the last measure of average earnings, which went up by 2.4% in the year to April. That means household spending power is declining. Today's wages figure will be examined closely for signs of further erosion.

The UK employment data this morning are forecast to show an extra 10k jobseekers with the rate of unemployment steady at 4.6%. Average earnings growth is also supposed to be steady, at 2.4%. A lower number would be unhelpful to sterling

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Weekly currency update is below.

The Aussie was the second best performer among the major currencies, behind the Canadian dollar.  Against sterling it strengthened by one cent and it added half a US cent.  It got two statistical legs up, the first coming when weak retail sales and slowing inflation in the States cast doubt on the upward course of US interest rates.  The second was home-grown, in the form of unexpectedly strong jobs data that showed employment increasing by 42k in May. 

 Sterling was fortunate not to extend the losses it suffered in the immediate aftermath of the general election.  UK industrial and manufacturing were disappointing, as were retail sales.  Inflation accelerated to 2.9% (CPI) and 3.7% (RPI), outpacing the 2.1% increase in wages and putting a further squeeze on household spending power.  The pound was saved by the three members of the Monetary Policy Committee who unexpectedly voted for higher interest rates.  No actual increase is imminent but there won't be any further cuts.

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Brexit press conference due at 5pm

This week is set to be another Intriguing chapter with official Brexit negotiations starting today. In the absence of a U-turn the UK position of wanting free trade and border controls without being part of the customs union is unlikely to meet a welcoming committee and as such Sterling may remain range-bound for now.

 Sterling remains vulnerable to domestic political instability – with the weekend press focusing on the existential threat already to this government.

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The pound is weaker today.

In Australia, there was the release of the Westpac Consumer sentiment, which rose from -1.8% to 0.4%. This has helped the Aussie dollar against the pound.

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AUD weekly currency update

Wednesday was an interesting day for the Aussie.  Early on, the consumer price index figures showed Australian inflation slowing by more than expected in the second quarter, down from 2.1% to 1.9%.  It was a bigger fall than investors had been prepared for and gave new meaning to the deputy governor's warning, the previous Friday, that they should not be looking for any early increase in interest rates.  The Aussie took a step to the rear.  It more than made up for it later in the day when the US Federal Reserve dampened expectations of an imminent tightening of monetary policy,

The net result was an Australian dollar that was virtually unchanged on the week against the British pound.  It strengthened by three quarters of a US cent.  The two were among the week's top performers, sterling helped by a provisional expansion of the UK economy by 0.3% in the second quarter. 

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As expected, the Reserve Bank of Australia kept its cash rate benchmark unchanged at 1.5% after this morning's meeting. After dissecting the language of the RBA's statement investors decided that an early rate increase is unlikely. The Aussie lost a little ground on the news.

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The Bank of England Monetary Policy Committee today announced its decision not to raise interest rates with a vote of 6-2 for no change. The last rate change came in August 2016, cutting the bank rate from 0.5% to 0.25% following the Brexit vote. 

The report also suggested “sluggish” growth in the UK economy, dropping forecasts from 1.9% to 1.7% in 2017. As a reason for the change, Governor Mark Carney cited weak wage growth and rising inflation reducing the spending power of households. 

Since the announcement, the pound has weakened.

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The Australian dollar had a strong week, although it stumbled slightly later on. The strength can largely be attributed to weakness elsewhere, from the US and NZ dollar and the pound. July retail sales data from Australia showed that consumer spending was stalling and the trade surplus was listed at $0.46 billion, the lowest number for three months.

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Yesterday, the Bank of England continued to be supportive of sterling. Chief economist Andy Haldane told a TV interviewer that the Monetary Policy Committee is "nearing the point" where it will increase interest rates. He argued that "rather than being a source of fear or trepidation, this ought to be a good news story". The pound strengthened by an average of 0.2%.

The coming two days bring speaking appearances by central bankers from Japan, Britain, Euroland, Australia and the United States. Recent experience suggests that their observations will have more impact on exchange rates than the growth and inflation data which also feature on the agenda.

 

 

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