The Australian Dollar weekly update - 29.06.10

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A GOOD BUDGET FOR STERLING

Britain's triple-A credit rating is no longer under threat. Australia's economy keeps a low profile.

 

It took sterling a while to move above last Monday's $1.6850 starting point but it did eventually on Tuesday afternoon. Thursday's peak was just shy of $1.74 and was followed by a dip to $1.7150. It was back up above $1.72 by the time London opened this morning.

 

Mercifully, Britain's currency is doing better than its football team. There was no obstacle for sterling among the very few economic data that appeared during the week. The British Bankers' Association figures for mortgage lending showed a very slight increase in May and the Confederation of British Industry's distributive trades survey (a sort of private sector measure of retail sales) improved from -18 to -5. The minutes of the Bank of England's June Monetary Policy Committee meeting produced a positive surprise for sterling when they revealed that one MPC member, Andrew Sentance, voted to raise interest rates by 25 basis points from 0.5% to 0.75%%. Although the other eight members thought it better to leave the Bank Rate unchanged, , investors were heartened by the idea that rates can go up as well as down.

 

The main event for sterling was the much-trumpeted 'emergency' budget from the coalition government. For the person in the street there was no escaping the pain that the chancellor was dishing out by the bucketful. For sterling, however, the return to prudent stewardship of the economy was a godsend. For the first time investors could live with the growth forecasts that would make the formula work. Taking into account the measures set out in Mr Osborne's budget, the New Office for Budget Responsibility reckons the economy will grow at annual rates of 1.2%, 2.3%, 2.7%, 2.9% and 2.7% in the next five years. Those are not big numbers but they are credible. The market also has faith in the OBR's projection that government borrowing will fall from 10.1% of gross domestic product to 1.1% over those five years.

 

It will take time to see whether the government can deliver on its promise to reduce departmental spending by a fifth. However, there seems little doubt that it will do its best to make the savings. As far as investors are concerned, that is good enough for the time being. The ratings agencies are on side as well. One of the chancellor's opening remarks was to the effect that he was keen to preserve Britain's top-drawer AAA credit rating and the agencies were quick to say they had no problem with that.

 

A near-total lack of useful economic data left investors with no new reasons to sell or buy the Australian dollar. New motor vehicle sales were down by -3.2% in May, up by +16.4% on the year. The Conference Board's leading index, a composite indicator that seeks to point the way ahead for the economy, softened from 0.3% to 0.1%. The only other pointer was Westpac's survey of industrial trends in the April-June quarter. Its Actual Composite Index was minutely lower than three months earlier but, at 56.6, was appreciably higher than its 52.1 average over the last 10 years; it was also the second best reading in more than two years.

 

Sterling has not gained a whole lot of ground since Tuesday's budget but it has recovered the previous week's losses and it looks as though the market is satisfied with the suitably brutal austerity regime. Buyers of the Australian dollar should hedge less than 50% of their requirement and hold on for better levels.

 

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