Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 26/04/10
Britain's economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, dropping back below the 1.6675 resistance that we highlighted in recent reports. This morning the pound is ticking higher as investors, having digested the growth data, decided that there's a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
It's a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed' have made a habit of stating that rates will remain low for "an extended period". Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months.
Dropping that phrase would therefore be the Fed's warning to the market that a rate rise is on the way, and would negatively impact the high yielding currencies, which at present are continuing to benefit from investor risk appetite and the lack of yield on the US dollar. Analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009. Interest rates aside, positive US economic data tends to add to the allure of the high yielders. Investors take these US data as a sign of global recovery, and perversely, they sell the US dollar and buy the Aussie dollar as appetite for risk increases along with their confidence in the economic outlook.
The dominant story driving the pound this week is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling against the euro may support that view.
Australian inflation data on Wednesday is expected to show an annualised inflation rate around 2.8%. On Friday a Reserve bank official said that interest rates are now "close to average", indicating that the rate tightening cycle may slow. The RBA has raised interest rates several times over the last few months, most recently on April 6th when they raised the benchmark lending rate to 4.25%. The next policy meeting is May 4th, and following Friday's comments futures markets are now pricing in a 26% chance of another rate hike, down from 40% before the comments were made. If Wednesday's inflation data is higher than expected, the chances of another rate hike will increase, and that could drive AUD higher. Conversely, a figure on or below expectations should reinforce the "no change" view.
The technical outlook remains negative for sterling. Demand for the Aussie dollar remains very strong, and the fundamentals driving that demand are still very much in place. Stock markets are hitting new highs almost every week (stocks are a barometer of investor risk sentiment) and commodities are also rising. The Australian economy is a net exporter of commodities (including gold) and benefits from higher prices. The price chart is still showing a down trend, and we would need to see sterling capture the 1.6675 level to improve the outlook. We continue to recommend a cautious approach, hedging at least half of any exposure at current levels.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 16/04/10
The Aussie dollar remains well bid after a move by Singapore to revalue their local dollar upwards. The currency appreciation comes after strong growth data adds to evidence of economic recovery in Asia, and leads to speculation that other Asian nations will follow suit, in particular China. Currency bets currently price in a 2.8% appreciation for the Chinese Yuan over the next 12 months. A revaluation would make Chinese products more expensive to foreign buyers, denting demand, and therefore also denting Chinese demand for Australian commodities. However, in the short term markets are focussing on the recovery story, and that’s good for risk appetite, boosting higher yielding assets like the Aussie dollar.
News of mushroom clouds and airport chaos also had little effect on sterling, given that most European countries have been similarly impacted.
The pound was largely unchanged against the dollar after last night’s “presidential” style TV debate between the three party leaders. The clear winner was Nick Clegg of the Liberal Democrats. News snippets through the week suggested that the Tory’s lead was widening over Labour, but any swing towards the Lib’ Dem’s as a result of last night’s debate will make the election outcome less stable and increase the likelihood of a hung parliament. That theme was starting to recede earlier in the week, but is now likely to weigh on the pound again during the build up to the vote. Markets are still pricing in a Tory victory with a narrow majority, so sterling’s better mood is vulnerable to break if that view changes.
The technical outlook remains negative. Sterling has at least managed to trade sideways for a few weeks, but the inability to move above 1.67 is a concern, and makes the pound look vulnerable to further losses. Buyers of the Australian currency who have time on their side and an appetite for risk could place a stop order below 1.6250 based on the interbank rate (the March record low) and hope for a bounce in the meantime, but this does risk losing a couple a couple of percent if the market drops.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 09/04/10
A couple of key data items helped to sooth sterling investors last week, allowing the pound to close in positive territory for a second week in a row following a string of seven consecutive losing weeks against the Aussie dollar. The UK purchasing managers index rose to the highest level since the start of the recession, and a final revision to fourth quarter GDP put growth at 0.4%, higher than originally indicated. House prices also rose 0.7% in February.
The other big story here is the imminent general election, scheduled for May 6th. There is considerable uncertainty surrounding the outcome, with a strong likelihood of the first minority government in 30 years. The pound is holding up well considering the fact that markets hate uncertainty; but this can be put down to the fact that the uncertain outcome has been well understood for some time now. Investors are growing used to this and have already acted accordingly. Setting a firm date helped, and if the polls start to swing strongly in any given direction we may even see sterling strengthen. The latest polls suggest the Tories may have extended their lead in March.
The fact that sterling has been able to rally against the Euro and US dollar has meant little to Aussie dollar buyers. Buoyed by strong commodity prices (gold is trading at 3 months highs) and another interest rate hike by the Reserve Bank of Australia, the currency is outperforming most other major units. Interest rates are now 4.25%, with more rises expected. In the UK the return is just 0.5%, making it a relatively dull investment!
The weekly chart below shows the sterling/aussie dollar rate over the last six months. We have spent the last four weeks consolidating close to the recent lows, which does not bode well for the pound. We continue to advocate a cautious approach, advising those clients who have a low appetite for risk to consider fixing their exchange rates now rather than speculate on a possible bounce. The technical outlook is skewed very much against the pound.
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