Good Morning

Some relatively positive news for sterling to kick-start your week!

Thanks

Nat


STERLING IGNORES PROSPECT OF HUNG PARLIAMENT
Mostly positive UK data but GDP disappoints. Good-news-bad-news treatment from the RBA.

There was movement in the GBP/AUD exchange rate last week but in the end it did not take it far. The pound added a net half cent to open in London yesterday morning at $1.6650. The extremes of its range were Wednesday's $1.6450 low and a high above $1.67 on Friday.

With the opinion polls pointing ever more precisely to a hung parliament after next week's general election the FX market gave every impression that it had come to terms with such an outcome. Sterling was a winner on most fronts and its trade-weighted index ended the week just short of 80, almost exactly the same level at which it began the year.

It received considerable help from most of the week's economic data. Tuesday's consumer price index figures showed inflation accelerating again to 3.4%, a level that investors thought might be high enough to influence the Monetary Policy Committee. Yes, the Bank did warn that inflation would speed up before it fell back to its target zone, but what if it does not fall back? The question itself was enough to raise the spectre of higher UK interest rates and, with it, the pound. Wednesday's employment figures were less compelling but a 33k shortening of the dole queue was positive enough. Thursday's money supply figures revealed total government borrowings of £163.4 in the financial year just ended, slightly less than last month's budget forecast and 8% below the chancellor's original estimate.

Friday's first estimate of overall economic performance in the first three months of the year was far from helpful though. For the third time on the trot, economists and investors overestimated quarterly expansion of gross domestic product. Instead of the expected +0.4% they had to cope with +0.2%. Sterling reacted just as it had done to identical situations in October and January. It went down. But not for long.

In a week with very few hard economic data investors had to pick the bones out of a Westpac leading index that went up from +0.2% to +0.5%, a -2.7% monthly fall in new vehicle sales and a +0.3% rise in import prices. None of the figures set pulses racing.

Fortunately, the Reserve Bank of Australia was ready to step in and get things going. On Tuesday the minutes of the RBA's last policy meeting made investors more confident that the cash rate would see a sixth increase next month. The AUD jumped a cent higher on the news. Having wound the market up on Tuesday RBA governor Glenn Stevens did the opposite on Friday. He said in a speech that Australian interest rates are 'pretty close' to the 10-12 year average and that their future course is an 'open question'. Whether deliberately or not, he poured cold water on investors' expectation that Aussie rates are heading for the sky. Whether or not the RBA decides to increase rates next month could all depend on Thursday's inflation figures.

Sterling's ability to shrug off the opinion polls and the disappointing GDP figure gives room for guarded optimism but, with the election only ten days away and higher AUD interest rates in the wind, there is little prospect of any substantial rally.

ELECTION WORRIES HAUNT STERLING ONCE AGAIN
Lib-Dem lead scares investors and sterling. Australian confidence dented by higher interest rates but it could be worse.

Sterling opened last week in London at $1.6590 and this morning at $1.6602. The dozen ticks that separate the two prices do not constitute a move. In the interim, the pound remained almost exclusively between $1.65 and $1.6650.

Unquestionably the week's most important event for sterling was Thursday's debate between the three main political party leaders. That the Lib-Dem's Nick Clegg came out on top was not a total surprise: because the other two did not deign him worthy of attack almost his every statement could be made to sound positive. Nor was anyone amazed by the prime minister's typically wooden delivery. What has absolutely been a surprise, though, is the way those personal appearances have affected the parties' standing in the opinion polls. Voters have fallen for Mr Clegg's 'reasonableness' to such an extent that the latest YouGov poll put the Liberal Democrats on 33%, the Conservatives on 32% and Labour in third place with 26%. Psephologists are not in complete agreement as to how things would work out in the commons if people were to put their crosses where their mouths are. It is entirely possible, however, that Labour could end up with 268 MPs, the Conservatives with 230 and the Liberals with just 120. There is nothing in Britain's eccentric democratic system to say that the party with the most votes gets the most seats.

It was beginning to look last week as though investors had come to terms with the idea of a hung parliament, that they had priced all the bad news into sterling. But this latest opinion poll has forced everyone to have another look at their position. The Financial Times asked ten of Britain's biggest fund managers how a hung parliament would change their attitude to investing in UK government bonds - gilts. They all agreed that such an outcome was 'the biggest threat to the market'. Only one of the ten thought gilts would do better under the Tories. The other nine 'were equally happy to see a new Labour or Conservative government, provided it had a clear majority.' And that attitude has carried over into the currency market. Investors have rediscovered their nervousness and so has sterling.

For the Australian dollar last week was all about sentiment, especially as it relates to interest rates. NAB's survey of business confidence found companies less optimistic, especially in the transport, manufacturing and wholesale sectors. The confidence index fell three points to 16. On the other hand, those same firms had a more upbeat feeling about how things are going at the moment. The business conditions index went up by five points from 8 to 13. The customers of those firms have also experienced a slight dent to their confidence. Westpac's consumer confidence index fell by -1.0% from 117.3 in February to -116.1 in March.

However, that is not such a bad outcome considering the four interest rate increases that the Reserve Bank of Australia has delivered in the preceding six months. The cash rate that stood at 3.0% in September is already up to 4.25% and there are undoubtedly further increases in the pipeline. But those hikes will probably not come at a rush. Having warned investors not to expect a rate increase at every board meeting the RBA surprised many by its April move from 4.0% to 4.25%. After its next tightening of the screw, either next month or in June, there could well be a pause while the RBA sits back to consider the effect of its action so far.

Hi everyone

A continuation of the status quo as far as Sterling was concerned. The election looms in the UK and it is still difficult to predict if this will result in a small recovery or yet more burning bridges.

For a full overview, please read our update below.

Thanks

Nat


ANOTHER USEFUL WEEK FOR STERLING
No surprises from the Bank of England. Good Australian employment figures disappoint over-ambitious investors.

The $1.63 - $1.67 range held sterling steady for a fifth week. The pound did not quite touch either side of its horizontal channel but it came close to both. It opened in London on Monday morning at $1.66, a cent higher on the week.

Against the majority of currencies it was another useful week for sterling, despite conflicting economic data and opinion polls that continued to point to a hung parliament. There was even disagreement among supranational agencies as to how Britain should address her budget deficit. The Bank for International Settlements sided with (what investors assume to be) the Tory strategy of wielding the axe on public spending as soon as possible after 6 May. If the UK is to avoid spending a quarter of its gross domestic product on interest payments in 30 years' time the BIS said there would have to be 'drastic' austerity measures. The Organisation for Economic Co-operation and Development, on the other hand, supported the Labour view that to slash spending now would be to choke off recovery before it has properly begun.

The UK services sector purchasing managers index was at the same time good news and bad news. The good news was that, at 56.5, it was a point clear of its nearest competitor. The bad news was that it was two points down while the opposition was at least two points higher on the month. Industrial (+1.0%) and manufacturing (+1.3%) production data were better than expected and a vast improvement on the previous month's negative figures. The same was true of the Halifax house price index, which was 5.2% higher on the year.

With the election campaign under way there was no chance of any surprises from the Bank of England's Monetary Policy Committee, which issued a no-change statement almost identical to the one it put out in March. Indeed, the May meeting has been postponed to the 10th in order to avoid any possibility of interference with polling day.

With the Reserve Bank of Australia's interest rate increase out of the way on Tuesday there was not much to keep the Australian dollar entertained during the remainder of the week. The AIG performance of services index was fractionally higher in March, 48.4 as opposed to 48.3 the previous month. Unfortunately it looked a bit sad in comparison with similar (but not identical) measures elsewhere, all of which were in the expansion zone above 50.

On the face of it there was nothing sad about Thursday's Australian employment data. New job creation in March amounted to 19,600; within a thousand of analysts' predictions. It was a decent enough number but clearly not decent enough for the investors who had been spoiled by better-than-expected figures in previous months. The disappointment lingered on Friday and over the weekend, partly as a result of the Canadian dollar encountering an identical setback.

The UK general election means risks for the pound in the next month. Even so, the pound's six-week range shows no sign of breaking in either direction.