httpvh://www.youtube.com/watch?v=WkqMXOYu7b0
GBP takes a pounding as production falters.
• UK growth on notice after soft data.
• Germany plays France in restructure negotiations.
• Aussie-Greenback had a simple life before Stevens.
The UK is one of the burgeoning growth stories of the developed economies however recent data suggests some cyclical headwinds. The UK economy doesn’t suffer the same extensive weakness in the housing market as its Atlantic neighbour however it’s industrial output in May was not the crutch required to prop up their economy. Data out of the UK included Manufacturing Production (-1.5%), Industrial Production (-1.7%) and the Claimant Count Change (19.6K), while the Housing Price Balance (-28) slipped further. Inflation figures (CPI 0.2%) fell in line with output which is a positive for the recovery as the BoE can maintain interest rates at 0.5%. The silver lining in the data was that Consumer Confidence rallied (55) which offsets the often dovish rhetoric from Mervyn King and provides room for growth as this figure has stalled recoveries in the past.
Greece had its debt downgraded this week to the lowest possible level, one rung below Iraq and Afghanistan. The inflationary pressures facing the Eurozone became less pertinent for the AUDEUR cross as political pressures undermine Prime Minister Panpandreou’s ability to drive austerity measures to service existing debt and secure a second bailout. This has pushed the premium paid for Greek debt relative to German bunds to nearly 15%. One of the impediments to the second bailout is that the IMF is not content with the EU’s plan to reduce Greece’s funding gap, which currently holds debt that is 143% of GDP. The debt restructuring options include Germany’s position which requires creditors to sustain some of the costs of the next bailout by extending the payment schedule by seven years. This however is considered a default by ratings agencies. The continued political malaise holds a fresh round of risk of contagion to Portugal, Ireland and Spain and the Euro has fallen as a result.
The economic data out of both Australia and the US has been uneventful this week and without a strong lead we have seen the local unit drift lower. However, a speech from RBA Governor Glenn Stevens on Wednesday prompted fresh speculation of interest rate hikes. He mentioned that the “underlying rate of inflation is more likely to rise than fall over the next couple of years” and that “further tightening of monetary policy is likely to be required at some point for inflation to remain consistent” with the target. This is the largest endorsement of our economy from the Governor this year and since the GFC, any spruiking done by Stevens has led to strong support for the Aussie. This economic growth will be key if the local unit is able to disconnect from a potential softening in equities States-side.
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