AU economic constraints overshadow Wall Street.
• UK bearish-speak overrun by Consumer Confidence.
• Equity market growth as a barometer for AUD gains is finite.
• Euro sovereign debt yields avoid dire straits.
The UK economy has been suppressed since the GFC and officials have often been quick to play down growth prospects. We may have seen the highs for the AUDGBP cross as positive economic data trickles in with a linear consistency as opposed to the US “fits and starts” style recovery. BoE Governor Mervyn King has often undermined growth in the pound with dovish talk, a message that has supported export markets by ensuring there isn’t a premature appreciation in the pound. This week, we saw their Consumer Confidence (53) figure jump from 45 while there CPI figure (3.7%) will surely prompt monetary policy belt tightening, north of the current cash rate (0.5%). If these figures are a precursor for the UK it will indeed be the year of the pound.
Overseas equity markets have been a precursor for AUD fluctuations since the GFC begun in 2007, with overnight moves correlated with Wall Street. With the S&P500, the key barometer for risk appetite, now above the August 2008 level it’s a good time to consider where US stocks will go from here and whether they’ll continue to support the Aussie. Reports going into this quarter’s earnings season suggest that there will be another round of better than expected figures which may see the Aussie have another run towards the highs of 1.02. The current risks to this upside are attached to the constraints China are imposing on banks to curb lending and the impact the QLD floods will have on the local economy. Furthermore, as soon as economic conditions gain traction States-side, the carry trade of borrowing in USD and investing in AUD will be promptly removed from vogue and the AUD will soften. As US treasuries look increasingly unpopular while having a lag in US economic fundamentals we have the conditions for a strong Aussie. As soon as the US data performs with conviction however, the Aussie will not be supported as the carry trade comes off the table.
Europe has again been grabbing headlines this week as Portugal refinanced their debt after their Finance Minister mentioned that refinancing at 7% would be a price they couldn’t afford. They paid 6.8% in the round of debt auctions which ensured they didn’t need a Greek-style rescue and allowed risk appetite to come back onto the table and the Euro to strengthen.
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