By Jon Beddell
Foreign Currency Market Update – GBP / AUD Update
The Aussie dollar rose strongly in October as stock markets rebounded sharply from the late summer sell off. As investors waded back into stocks and riskier assets, demand for safe haven currencies waned, while high yielding currencies came back into vogue. Around Halloween investors became increasingly alarmed at the house of horrors represented by the Greek and Italian sovereign debt problems. Regime change in both countries has done little to calm markets, although it should be noted that Italian bond yields have dipped from the 7% level that caused alarm a couple of weeks ago. Investors still demanded 6.29% in a €3bn auction of new bonds yesterday, the highest level since 1997 and a full percent higher than a similar auction just one month ago. Once investors start demanding those sorts of returns, serious questions are asked about the credibility of the issuer. A move above 7% is what triggered the collapse of the Greek bond market, and markets are highly sensitive to the prospect of a possible repeat performance from Italy. This is all pretty scary stuff, and investors are likely to remain skittish, especially with Spanish yields now heading above 6%. Once markets become spooked, fears can quickly escalate into panic, which is never helpful for high yielding currencies like the Aussie dollar. In previous years we have seen massive spikes in the Sterling/Aussie exchange rate, and if the Euro crisis spirals out of control we would likely see another short term move higher.
The Bank of England kept interest rates on hold at 0.5% last week, as well as the volume of quantitative easing. Producer price inflation showed a slight moderation to 5.7% year on year, and this morning’s closely watched retail price index also slipped to 5.4% from 5.5% last month. On the whole this is negative for Sterling as any sign of moderating inflation is likely to keep the Bank of England from raising interest rates. This is especially true when all signs point toward a sluggish economy. In terms of data to watch for this week the main course will be the Bank’s quarterly inflation report accompanied by a speech from governor Mervyn King at 10:30 on Wednesday.
In Australia the trade surplus for September was slightly below expectations, but still showing a positive balance. Unemployment ticked lower to 5.2%. In short, all is well from a fundamental standpoint which continues to justify the long term appreciation of the Aussie dollar.
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