By Jon Beddell
A sharp rise in retail sales for April failed to give Sterling much traction in the market last week. Sales rose 2.8% on the year, but most commentators put this down to the royal wedding and associated bank holidays. After moderating slightly in March inflation came roaring back in April, standing at 4.5%, more than double the Bank of England’s target. Investors were not overly impressed as other data indicating a slowing economy have ensured that the BoE will not move until they absolutely have to. With no imminent interest rate hike on the cards, why buy Sterling?
Australian policy makers have a more comfortable backdrop in which to work, and interest rates there are already 4.75%. Wage inflation came in lower than expected last week at 3.8% compared to the 4.0% estimated by economists. The minutes of the latest Reserve Bank meeting shows that the RBA believe further interest rate rises will be necessary “at some point”, but not in the short term.
With interest rate outlooks and economic stat’s leaving the Sterling/Aussie market relatively well balanced the exchange rate has been trading within a five cent range over the last few weeks. We did briefly see a record low on May 11th but there was no appetite for selling Sterling lower from those levels. We’re starting to see a move to the upside, driven by a new wave of investor risk aversion over the last few days. Negativity surrounding the Greek bailout and the prospect of other European defaults are worrying investors, and this is causing a move out of higher risk assets. A sharp correction in some commodities is also keeping the commodity related currencies in check. If risk aversion continues to spike we could see further upside for Sterling in the short term. Unfortunately, we have seen these short term spikes many times over the last few years and the Aussie dollar has always rebounded to make new highs. Clients with Aussie dollar requirements should consider covering half of their exposure now, and taking a “wait and see” approach on the balance, at least while the rate is heading in the right direction!
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