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Following a sharp decline in December where £-aud lost almost 10 cents (6%), the pound has finally managed to stage a recovery this month, clawing back 8 cents of the lost ground from last month to close back above the 1.6000 level.
The latest Reserve Bank of Australia policy meeting was held just as we went to print. No surprises on policy with interest rates held at 4.75% and the accompanying statement suggesting this is likely to be the case for some months, as the after effects of the recent floods filter through to the economy. Despite acknowledging string growth in China and India, the RBA remain wary of ongoing problems in Europe.
After a strong November, there was disappointment in the labour market in December with a meagre 2,300 change in employment, although the unemployment rate dropped a couple of notches to 5.0%. In an
otherwise quiet data month for Australia, the only other release of consequence was the Q4 consumer price index which unexpectedly slowed to 0.4% against expectations of a 0.7% rise. The data resulted in interest rate hike expectations being pared back slightly and the A$ slipped lower.
Floods in Queensland, which all but brought the state’s coal industry to a halt, have also had a severe impact on the economy which looks likely to ensure interest rates remain on hold for a few months.
The pound posted its largest net gain against the A$ in two years but needs to clear 1.6200/30 to suggest potential for a more meaningful recovery. If seen, this would create the first higher monthly high since July last year and allow gains towards 1.6290 initially ahead of 1.6595/1.6640 and 1.6750. Support lies at 1.581500, 1.5670, 1.5550 and 1.5390 ahead of the 1.5140 low from the beginning of January.
£ - AUD
The pound fell through the NZ$2.00 mark in December and again in January for the first time since the NZ$ was floated in 1985. Despite closing both months back above this psychological level and a recovery last month of almost 7 cents, the pound continues to underperform.
Last week, the Reserve Bank of New Zealand met for the first time this year and kept rates on hold at 3.0% as per market consensus. The accompanying statement suggests this is likely to be the case for a few months yet as the central bank maintains its wait and see approach until a more robust recovery is underway.
Data for January was relatively buoyant with inflation up 2.3% in Q4 and 4% higher than a year ago. However, the data was distorted by a sales tax increase and will have no impact on RBNZ policy. Retail sales for November were firm, coming in at +1.5%, well above consensus. Lastly, the performance of services’ index rose to 52.5 in December rounding off a full year of expansion in the sector.
Technically, January’s gains are a step in the right direction for sterling but above 2.1000/2.1155 would be required to suggest more meaningful upside potential, initially to 2.1580 then 2.2000 and 2.2250. Initial support now sits at 2.0430 then 2.0335/00, 2.0000 and the 1.9865 low from the beginning of the year.
£ - NZD
The recovery in £-cad from late spring last year led to a period of consolidation through autumn. The final two months of 2010 saw sterling lose almost 8 cents but despite opening on the back foot at the start of this year, the pound has managed to claw back around 50% of these losses into month end.
The Bank of Canada held its overnight rate at 1% in January and looks likely to continue with accommodative policy for the foreseeable future, again noting any reduction of stimulus ‘would need to be carefully considered’. Inflation expectations remain ’well-anchored’ and growth has been upgraded slightly. Overall, the recovery in Canada is proceeding as anticipated, private consumption remains subdued while business investment is seen rebounding strongly. Once more, the BoC noted the strength of the Canadian dollar is hindering exports.
The first data release of New Year in Canada was the influential IVEY purchasing managers’ index. The index was unexpectedly soft with a flat reading of 50.0 for December. The labour market was strong with a +22,000 net change in employment although there were actually 38,000 full time posts created. The unemployment rate was steady at 7.6%. The trade deficit narrowed sharply in November to its lowest level in two years. Unfortunately, the narrowing came on the back of a small rise in exports and a 3.2% drop in imports. Housing starts also disappointed, falling almost 9% in December. Further gloom came in the shape of a sharp fall in manufacturing shipments, although this was largely offset by six successive monthly gains in retail sales. January rounded off with inflation data, which, although a touch softer than consensus was close enough to expectations to avoid any major market impact.
Last month’s price action has created a higher low and a bullish engulfing pattern which may finally translate into a sterling recovery. The next hurdles to clear lie at 1.6475/1.6545 and 1.6730 followed by 1.7000/70. Back below 1.5850/1.5785 and 1.5675 would undermine the potential for recovery and place 1.5290, 1.5000 and 1.4840 back in the firing line.
£ - CAD
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