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Discussion in 'Money & Finance' started by John From Moneycorp, Feb 2, 2010.

  1. John From Moneycorp

    John From Moneycorp Foreign Exchange Expert

    Britain emerged from recession in Q4 - just. Australian rates likely to rise this week.

    Compared with its lack of performance elsewhere the pound did tolerably well against the Aussie dollar. It never traded below last Monday's $1.78 starting point and made four serious attempts to break above $1.81. It was only half a cent below that level when London opened.

    The week began with optimism that figures for the fourth quarter of 2009 would confirm that, after 18 months, Britain had at last managed to put the recession behind. Having overestimated growth in the third quarter, analysts were quietly confident with their guess that gross domestic product expanded by +0.4% in Q4; not fantastic growth but acceptable under the circumstances. Again there was disappointment. At +0.1% quarterly growth was the smallest ever seen. The optimists who had filled their boots with sterling ahead of the announcement were quick to offload their holdings.

    Surprisingly, the dismay had evaporated by the end of the following day following a speech by Andrew Sentance, the ebullient Monetary Policy Committee member who has recently made a habit of directing the market's attention to the possibility of higher UK interest rates. Addressing the British Property Federation he mentioned the word 'growth' 21 times, referred to the pound's 'competitive' position against the euro and defended the idea that monetary policy should 'keep a check on inflation over the medium term'. The market's overall take on the speech was that at least one MPC member was leaning towards higher interest rates.

    The old credit ratings story cropped up again on Thursday, this time with rather more than vague rumour to make it fly. Standard & Poor's, one of the big three credit ratings agencies, announced it had its eye on sterling because that 'UK banks are no longer among the world's most stable and low-risk.' It did not amount to a downgrade - Britain still has its top-level AAA credit rating - but it was an unwelcome development for sterling.

    The Australian dollar, like the New Zealand and Canadian versions, suffered relative to sterling as a result of a slight but pervasive nervousness among investors. Their concern stemmed from various sources. Tighter Chinese monetary policy, credit ratings nervousness in Europe and President Obama's War On Banks all contributed to concern that the global recovery is still not assured. Without a return to growth all three commodity currencies - together with many emerging market currencies - risk finding it tough going in the export markets upon which they depend.

    Tuesday's Australia day holiday made for a fractured week's activity and there was nothing particularly surprising among the crop of statistics. Inflation almost doubled at the end of last year with the consumer price index rising by 0.5% in the fourth quarter alone. Analysts remain confident - if not 100% convinced - that the Reserve Bank of Australia will deliver another rate hike at this week's policy meeting with a 4% cash rate that will leave room for a further half percentage point of increases by mid-year.

    Sterling is well off its 25-year lows and there is no obvious threat of a relapse. That does not mean its future is assured, especially in view of the political and credit risks faced by the United Kingdom. Buyers of the Australian dollar should hedge 50% of their requirement.

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