by Jon Beddell
Foreign Currency Market Update – Australian Dollar Update
A couple of key data items helped to sooth sterling investors last week. The UK purchasing managers index rose to the highest level since the start of the recession, and a final revision to fourth quarter GDP put growth at 0.4%, higher than originally indicated. House prices also rose 0.7% in February. However, despite making progress against the euro and US dollar, the Canadian dollar has retained the upper hand, buoyed by strong commodity prices and robust January growth data of 0.6%, adding to the fourth quarter annualised figure of 5%. These growth data paint a clear picture of recovery, and with manufacturing and construction activity rising in January, some analysts are now expecting an interest rate hike by June. Canada’s central bank rate is 0.25%, the same as the US. However, the gathering momentum of positive data and strong commodities makes the Canadian currency more popular than its US cousin, a trend that has seen the USD/CAD exchange rate drop below 1.000 (or parity as it’s known) for the first time since July 2008. As I type one US dollar buys you just under one Canadian dollar.
The other big story here is the imminent general election, scheduled for May 6th. There is considerable uncertainty surrounding the outcome, with a strong likelihood of the first minority government in 30 years. The pound is holding up well considering the fact that markets hate uncertainty; but this can be put down to the fact that the uncertain outcome has been well understood for some time now. Investors are growing used to this and have already acted accordingly. Setting a firm date helped, and if the polls start to swing strongly in any given direction we may even see sterling strengthen. The latest polls suggest the Tories may have extended their lead in March.
The technical outlook remains bleak for sterling. The market is anchored close to recent lows and would need to do a lot of work to improve the outlook. A break above 1.5650 would be a start, but to really break the down trend we would need to capture levels like 1.6375 and 1.6500.
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