There are huge advantages for an economy if the country concerned has vast natural resources as Britain knew when the North Sea had an abundant supply of oil and gas. And that is what Australia has found out throughout the last two years - if they didn’t know it already. Most recently, the drought in Russia has decimated wheat output in that area so Australia’s crop is in great demand. The Aussie Dollar has strengthened on that and it is this kind of ‘leftfield’ information that can make all the difference to those who need to buy or sell a currency like the Australian Dollar. As long as China doesn’t overplay their slowdown in demand, we may well find the Australian Dollar is strong for quite some time to come.
Britain on the other hand is very much a service based economy with the service sector accounting for some 75 percent of Britain’s gross domestic product; so when the purchasing managers of the service sector are pessimistic, the rest of the economy should be nervous as well. That was the message we got yesterday when the service sector Purchasing Managers Index fell to 53.1. It’s a meaningless number unless you realise it is the worst reading in 13 months and then it brings home the fact that the UK economy is still finding things tough; as if you didn’t already know. Although that news came a day ahead of the Bank of England’s interest rate decision, it probably doesn’t alter the Monetary Policy Committee’s thinking but it is a timely reminder to all the members of the committee, especially Andrew Sentence, that growth in Britain is fragile. No change is forecast from the BOE and Sterling is sitting a tad below its highs after ending the longest period of consistent gains in nearly twenty years.
The European Central Bank is also making a decision on interest rates today. No change is expected from them either but at least they have the decency to hold a press conference after their meeting to discuss their decision. We have to wait a fortnight before we get the BOE minutes to find out what they discussed. Strength in the US Dollar in the last 24 hours has taken the shine off the Euro but nothing fundamental has altered on the European side of things.
In the US, things are also fairly similar to the way they were 48 hours ago but after five straight days of weakness, the US Dollar was bound to recover to some degree at some point. Slightly softer UK data, the threat of Bank of Japan intervention and an improvement in commodity prices all prompted traders to take profit on the US dollar sales from the previous month but I can’t find any evidence that this is a reversal; merely a correction before more US Dollar weakness. Tomorrow’s US employment report may be the catalyst that starts the next bout of USD weakness, so US Dollar sellers should be wary of the 12.30 GMT announcement on Friday.
The New Zealand Dollar lost some ground overnight after an unemployment report showed the jobless level grew much faster than forecast. The unemployment rate grew to 6.8 percent in quarter 2 compared to 6.0 percent in Q1 and a forecast of 6.2 percent. That comes after warnings from the central bank governor of a slowing economy and reduced expectations of further interest rate rises. The Kiwi Dollar, like its Australian counterpart, is a prime target for investors seeking higher interest rate yields, so that lack of upward interest rate momentum and a slowing economy has the potential to further weaken the currency. That is great news for anyone planning to import from or migrate to New Zealand.
Aside from the UK and EU interest rate decisions, today’s data diary is light but the German factory orders data could move the Euro and US weekly jobless claims figures offer a pointer on tomorrow’s US monthly employment numbers.
And finally, if Renault wants to sell us more of their cars, they have an odd way of showing it. In a recent survey they asked what 4,000 French people thought about Brits. Amongst the highlights were that only tea and watching football in the pub make us happy while we apparently lack romance and dress terribly. Quite how this is supposed to make British buyers desire a Megane is not explained but I would guess we need the car to hide our awful clothes away from prying eyes while we head to the pub to watch football, leaving our loved ones behind. I love a bit of stereotyping now and again don’t you!