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Discussion in 'Money & Finance' started by John From Moneycorp, Jan 12, 2010.

  1. John From Moneycorp

    John From Moneycorp Foreign Exchange Expert

    The likelihood of a defeat for Labour is positive for the pound. Sterling touches a 25-year low against the AUD.

    Last week cost sterling the six Australian cents between $1.79 and $1.73. After a brief hesitation on Monday the pound set off lower, slowing its descent on Thursday at $1.73 and bouncing to $1.75. Friday brought another retreat and it touched a 25-year low early this morning before opening in London at $1.73.

    The UK economy delivered some decently positive data. Two purchasing managers' indices, one for the manufacturing sector, the other for services, extended their progress into the 'expansion zone' above 50. The manufacturing PMI came in at 54.6, taking second place to the equivalent US measure. Services, with a score of 56.8, led the international field. The Halifax house price index added 1% in December, putting it 1.1% higher than it was at the end of 2008. Factory gate prices went up by 3.5% last year, squeezing manufacturers who had to cope with costs rising twice as quickly over the same period. But it was not the economic data that shaped sterling's performance, it was politics. News of an attempt to oust prime minister Brown sent the pound lower; confirmation that the coup had failed sent it back up again. Investors believe that a solution to Britain's spending gap requires a change of government. As long as it looks as though Labour will be out of office by June they are inclined to be patient with sterling. And as long as Gordon Brown is leading his party into the general election they are confident that will happen.

    The Westpac Melbourne Institute survey of consumer sentiment fell by 4.5 percentage points in December. It was a much smaller fall than might have been expected after three consecutive interest rate increases from the Reserve Bank of Australia and an even greater rise in mortgage rates. Homeowners with a mortgage were understandably less confident but renters were more upbeat, perhaps because they were relieved not to have a mortgage. There was more positive news from November's building permits data. Permits rose by nearly 6% in November, a third up from a year earlier. Retail sales were 1.4% higher on the month and the trade deficit narrowed by almost a fifth. Taken together, it looks as though it is game on again for a fourth rate increase from the RBA next month.

    Sterling is off its 25-year lows but only by about a cent. As much as the AUD's rally looks overdone, to assume a reversal at this stage would be optimistic. Although it is likely the pound will be above its current level in six months' time that will be of no consequence to anyone with Aussie dollars to buy in the meantime. Buyers of the Australian dollar should hedge at least 75% of their requirement and be ready to cover the balance if the pound embarks on another advance to the rear.

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