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John from Moneycorp

Australian dollar update 12/07/2011

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NIESR estimates UK economy grew by just 0.1% in the first quarter

Australian employment rebounds in June


For the first three days of the week sterling looked comfortably lodged within a cent-and-a-half channel. On Thursday morning it moved lower, eventually touching a record low against the Aussie. Friday afternoon brought a bounce of nearly two cents, courtesy of a hugely disappointing US employment report. When London opened yesterday morning the week's net damage amounted to a little less than one cent.


The UK economic data were not a great problem for sterling. Purchasing managers' indices (PMIs) for the construction and services sectors were no worse than expected. For construction, the figure was down by less than half a point on the month and exactly on target at 53.6. The services PMI came in at 53.9 – better than forecast and fractionally higher on the month. House prices were up by 1.2% in June, according to the Halifax, and the annual decline slowed from -4.2% to -3.5%. The British Retail Consortium revealed its shop price (inflation) index at midnight, showing a 2.9% annual rise in the year to June – the highest reading since October 2008.


The UK industrial and manufacturing production data included good and bad news. Manufacturing production rose by 1.8% in May instead of the predicted 1.0%, and the annual increase was 2.8% instead of the -0.6% decline investors had been expecting. The broader industrial production figures, which include energy and mining production, came in lower than expected at 0.9% and -0.8% for the month and the year.


Producer prices continued to accelerate, with UK manufacturers' costs rising by 17.0% in the year to June, while factory gate prices rose by 5.7%. The one fly in sterling's ointment was the estimate by the National Institute for Economic and Social Research for gross domestic product growth in the second quarter. At 0.1% it was close enough to zero to mean a risk that the official figures later this month could turn out to be negative.


The Bank of England's Monetary Policy Committee conformed to market expectations on Thursday, leaving the Bank Rate steady at 0.5% for a 29th month and making no new asset purchases. Investors will be keen to see the minutes of the meeting, which come out on 20 July, to see how the voting went and how much consideration the Committee gave to a renewal of quantitative easing with the asset purchase programme.


Australia's PMIs did not look at all good. The services PMI was a point and a half lower in June at 48.5. The construction index languished at 35.8 on a scale of 0-100 where anything below 50 represents shrinking activity.


Australia's trade surplus looked good though, rising to $2.3 billion in May from April's upwardly-revised $1.6 billion. Better yet were the June employment figures. Unemployment held steady at 4.9% while the employment change number showed 23.4k new jobs – far better than the 15.3k increase that investors had been expecting.


There was little reaction to the Reserve Bank of Australia's announcement that it would be holding the cash rate at 4.75% for another month. Governor Glenn Stevens said in his statement that "CPI inflation is expected to be close to target over the next 12 months" and that "the current mildly restrictive stance of monetary policy remained appropriate". Investors will not be holding their breath for a rate increase.


The biggest move of the week came on Friday afternoon after the US Bureau of Labor revealed its latest employment report. Including revisions to earlier months, US payrolls fell by -22k in May. Investors had been looking for a figure to the north of +100k. The extremely weak performance made investors nervous about the global economy as a whole and they sold risk-related assets, including commodity-export-related currencies. The Aussie dropped nearly two cents against the pound in less than an hour and has recovered very little of that loss.


This week kicked off with an unremarkable 4.4% increase in housing loans. The number was close to forecast. All that’s left on this week's Australian agenda is subjective measures for business conditions, business confidence, consumer confidence and inflation expectations.


The UK data are crammed into today and tomorrow, which started with the RICS house price balance, the BRC retail sales figure and Nationwide consumer confidence at midnight yesterday. Today there’s the trade deficit and the inflation numbers. CPI inflation is forecast to be steady at 4.5% for a third month with RPI 5.2% higher on the year. Tomorrow the employment statistics could well repeat the patter of recent months with more people in work and simultaneously more people claiming jobseekers' allowance.


The AUD is close to record highs against the US dollar and has just scored a new one against the pound. But however tempting it might be to look for a reversal, history teaches that unjustifiable currency strength is not in itself reason for a turnaround. Almost every currency move goes too far. The problem is that it’s impossible to tell until afterwards what constitutes "too far". Hindsight, as they say, is a wonderful thing.

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