By Jon Beddell
Foreign Currency Market Update – GBP / AUD Update
The Aussie dollar has been on the back foot since the stock market rout gained momentum in early August. Typically investors sell high yielding assets when fear grips the markets, and this was no exception. The Aussie currency lost as much as 10% against Sterling in just six trading days, sending the exchange rate up above 1.60 before settling back to spend the last two weeks consolidating just above the 1.55 level. Stock markets have found at least a short term low, allowing the high yielders to stabilise and trade cautiously higher in anticipation that the panic is over for now.
Economic data have taken a back seat compared to the forces of market sentiment, but there were a few notable figures out last week. UK consumer price index for July edged higher to 4.4% from 4.2% for June. However, the interest rate makers at the Bank of England are firmly on the fence and in light of the economic softness evident elsewhere it will take more than this to push them off, especially while wage growth remains at a lower than expected 2.2% when bonuses are excluded. Public sector net borrowing fell to just £20m in July as a windfall levy on banks’ balance sheets boosted receipts by £660m in the month, and lower local spending reduced outflows. In the US both industrial production and consumer prices were higher than expected (generally positive for USD) but the dollar was not able to keep up with Sterling.
In an otherwise desolate week for Australian economic news the Reserve Bank of Australia released the minutes of their August rate setting meeting which revealed concerns about the global economy amid heightened volatility and uncertainty. They decided to keep interest rates on hold at 4.75% and that will likely remain the case for some time.
The technical outlook is mixed. Having enjoyed a sharp rally things have calmed down and direction will be entirely dependent on whether stock markets resume their recent slide or continue to build on the rebound. Weak stocks equals weak Aussie dollar and vice versa. Given the big rally in the exchange rate it would be prudent for Aussie dollar buyers to cover at least half of any requirement at current levels and take a ‘wait and see’ approach on the balance.