UK ECONOMY GROWS BY 0.2% IN THE SECOND QUARTER But it could have been more without unusual factors such as the royal wedding Australian interest rates expected to hold steady at 4.75% this week. For a second week the Australian dollar made headway against the pound, touching a new high. It was a two-way street though, with a sharp fall for sterling on Wednesday and a rally that carried through Thursday and Friday morning. The net loss to sterling on the week was two cents. The Washington debt impasse overshadowed the market all week. With legislators unwilling to compromise on a budget deal the FX market was uncertain which way to jump. Sentiment changed almost on a daily basis, draining liquidity and making it more difficult than usual to judge direction. The result was relatively narrow ranges for most currencies and net movements only half as big as those of the previous week. Sterling made the best of a varied set of economic indicators. In particular it dodged the potentially negative effect of two weak figures from the Confederation of British Industry. In its industrial trends survey the CBI identified a -10% monthly fall in industrial orders and the distributive trades survey found retail sales down by -5%. That investors did not sell sterling on the news was principally because they were too busy selling the dollar – and they had to buy something. Whatever its ailments, Britain does not have a debt crisis and it does have a triple-A credit rating. And it was not all bad news from the ecostats. The British Bankers' Association and the Bank of England both reported a small rise in the monthly number of mortgage approvals. Nationwide's house price index rose by 0.2%, to leave it lower by just -0.4% in the year to July. In its press release, the bank speculated optimistically that, "as the economic outlook brightens, labour market conditions strengthen and housing affordability becomes less stretched, so demand for housing should improve". The first estimate of Britain's second quarter gross domestic product was less of a strong figure, more of a relief that it did not turn out worse. GDP grew by 0.2% on Q2, exactly as analysts had forecast. Crucially, it was not a negative. Also, the Office for National Statistics said in its bulletin that the figure would have been more like 0.7% had it not been for several unusual factors that influenced economic activity in Q2 – including the royal wedding and its extra bank holiday, the after-effects of the Japanese tsunami, the first phase of Olympics ticket sales and record warm weather. For the Australian dollar it was business as usual. Australia is thousands of miles from the nearest debt crisis and there is steady demand for its mineral and energy exports. There was one point last week at which the media were seriously tossing around the notion that the Aussie had become a "reserve" currency. They were not being totally stupid: investors who dislike the US dollar (and therefore by extension the Canadian dollar), the euro and the pound have turned their nose up at 71% of the world's traded currency. If, as last week, they also do not fancy the yen very much that’s 81% of tradable currency out of the window. So they ended up buying the NZ and Australian dollars and the Swiss franc. And gold, of course. The Australian economic indicators mostly had little bearing on the value of the dollar. A 3.4% rise in producer prices and a -0.1% fall for the Conference Board's leading index did not matter. Nor did a slight slowdown in the growth of private sector lending. What did make an impact was the CPI inflation number. Consumer prices rose by 3.6% in the year to June. It was a bigger number than the 3.6% that investors had been expecting and, with the Reserve Bank of Australia meeting this week to discuss monetary policy, encouraged investors to look for an increase in the cash rate from its current 4.75% level. Local analysts are in disagreement that this will happen. Whilst most acknowledge a possibility that the RBA could react to higher inflation with a rate increase, some believe the next move will be downwards, at the end of the year. The consensus is that Tuesday's meeting will result in no change. Other Australian indicators this week cover house prices, building permits, purchasing managers' indices and retail sales. On the fairly short list of UK economic statistics are the purchasing managers' indices, the producer price index and the Halifax house price index. On Thursday there is little doubt that the Monetary Policy Committee will leave the Bank Rate unchanged at 0.5%. On the broad front, sterling's relatively decent performance last week was a welcome reminder that investors do, after all, set some store by fiscal responsibility and AAA credit ratings. But they also value high and possibly rising interest rates. With a 4.75% return the Aussie already looks attractive, and just because it’s overvalued doesn’t mean it must go down.