The Australian Dollar weekly update - 26.07.10

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UK ECONOMY SURPRISES AND DELIGHTS

Gross domestic product grew by 1.1% in the second quarter of 2010. Australian inflation data this week will be a guide to next week's interest rate decision.

 

Sterling hovered around its $1.76 starting point last Monday before moving lower. It bounced briefly from $1.72 on Wednesday before bottoming out at $1.7050 the following day. A Friday rally took the pound back up to $1.73 and it opened in London this morning at $1.7250.

 

Between Monday and Thursday sterling did little to distinguish itself. Tuesday's public sector net borrowing figure for June was higher than expected at £14.5 billion but not big enough to prejudice the government's target for the year. Wednesday's minutes of the July Monetary Policy Committee (MPC) meeting raised eyebrows but not far enough to take sterling a great deal lower: The committee had discussed the idea of 'a further modest monetary stimulus', in other words another dose of quantitative easing ('printing money', as the tabloids carelessly describe it). There was no vote on the matter but the mere discussion was enough to offset the benefit of Andrew Sentance voting again for a higher Bank Rate. Wednesday's retail sales numbers were better than expected for the month of June at 0.7%, worse than expected for the year at 1.3%.

 

Sterling's fortunes changed in a most unexpected way on Friday when the Office for National Statistics published its first estimate of how Britain's economy performed in the second quarter of the year. After growing by 0.3% in the first quarter, gross domestic product (GDP) expanded by 1.1% in Q2. It was a far better result than the 0.6% that the analysts had predicted. The figure has to go through two revisions in the next two months and it might end up lower but, for the time being at least, it is a good number and helpful to sterling.

 

The Australian dollar's performance against sterling closely matched that of the New Zealand dollar. Both of them did well as a result of greater confidence among investors that the world's economy really is on the road to recovery. Britain's strong GDP figure helped that impression, as did a series of positive data from the euro zone. Also working in favour of the commodity-related currencies were the rising prices of the commodities themselves, with the CRB commodity index rising by 1.8% on the week.

 

When the Reserve Bank of Australia published the minutes of its last board meeting it included another reminder that its main concern is 'the medium term outlook for inflation'. That standpoint makes this week's consumer price index inflation figure an important one. Analysts predict that prices will have gone up by 1.0% in the second quarter of the year, lifting the annual rate of inflation from 2.9% to 3.4%. If they have, the assumption is that the RBA will raise its cash rate again at next week's meeting, election or no election.

 

That strong GDP figure could give sterling a further boost this week but it is also positive for the Australian dollar, in that it reinforces the notion of a recovering global economy. Buyers of the Australian dollar should continue to hedge 50% of their requirement.

 

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