The Australian Dollar weekly update - 15.06.10

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STERLING'S ADVANCE FOILED BY EURO HIGHS

Sterling/euro's failure to break higher prompts profit-taking-sell-offs elsewhere. Aussie data fail to impress but risk-appetite keeps the AUD buoyant.

 

Monday's cent-a-half cent rally gave way to an eight-cent decline that took the pound down early this morning. It opened in London off its lows but failing to exude confidence.

 

The week got off to a slow start for sterling. With no economic data - positive or otherwise - to help it on its way it festered on Monday and Tuesday. Wednesday's trade figures were not good. They showed once again how the weakened currency has totally failed to make any noticeable difference to the trade gap. Analysts are at a loss as to why this should be; their best guess is that exporters are using sterling weakness to boost their margins. Intriguingly, the slightly wider trade deficit did not get in sterling's way.

 

It was a different story on Friday when watery industrial and manufacturing production data were seized upon as a reason to sell. Sterling was already on the back foot, having bumped up against 18-month highs for sterling/euro.

 

Monthly declines of -0.4% for both manufacturing production and the wider-based industrial production were enough to send sterling two cents lower on the day against the US dollar, the euro and, proportionally, everything else as well.

 

There was no surprise at the Bank of England's decision to keep monetary policy unchanged in June. A survey in the Daily Telegraph of 25 UK economists gave weight to the suggestion that it would be next year at the earliest before interest rates started to move higher. However, the Sunday Times carried an article by MPC member Andrew Sentance in which he drew attention to the mysterious rise of inflation. The final sentence of the article provided food for thought; 'This will make for some interesting debates on the MPC in the second half of the year.'

 

For the Australian dollar the main upward influence came from a general appetite for risk among investors. The euro zone - the source of much of the angst in recent weeks and months - issued no new bad news and equity markets around the globe edged higher. As they bought shares, investors also put cash into the currencies they thought would benefit from a growing global economy, slow though that growth might turn out to be.

 

There was actually not a whole lot of Australia-specific good news. NAB's measures of business conditions and confidence were both lower; business conditions down from 8 to 6 and business confidence eroding from 13 to 5. Westpac's consumer confidence index slipped six points to 101.9 and home loans were down by -1.8% in April. Yet investors were not downhearted about the antipodean currencies. They see rising interest rates and generally resilient economic performance and they prefer it - at least for the moment - to the gloom that pervades austerity-hit Europe and debt-ridden America.

 

Buyers of the Australian dollar should note that sterling retreated twice last week from 18-month highs against the euro. Whilst there is every chance that the damage is temporary, and that the euro has further to fall against other major currencies, if sterling cannot hack it against the ailing euro it has no (immediate) chance against the recession-proof Aussie. Short-term buyers of the Australian dollar should consider increasing the proportion of their cover, expensive though it looks.

 

For more information and expert guidance on the currency markets, go to www.moneycorp.com where you can open a free, no obligation Trading Facility.

 

Foreign Exchange since 1979