The first half of this week’s session has seen further reasons ‘not to be cheerful’ for the world economy.
Foreign Currency Market Update – GBP / AUD Update
The latter part of last week brought significant volatility for the Australian Dollar, with a busy schedule of data releases and news emerging from the eurozone affecting price action. Last Thursday’s Australian labour market data beat expectations, showing that 38,900 new jobs had been created in the domestic economy last month. This saw the GBP AUD exchange rate head downwards to 1.5523, which at the time was its lowest level since the third week of April. However, the positive move for the Aussie was stopped in its tracks when the Bank of England announced at midday on Thursday that it would be maintaining its current monetary policy stance, meaning that there will be no increase to the £325bn already allocated to the Bank’s Quantitative Easing programme – for the time being, at least. The news proved supportive for the Pound, as many market participants had been ‘pricing-in’ an increase to QE.
Friday’s session saw global stock markets lose ground, as rumours circulated amongst the global investment community that Spain’s banking sector was on the verge of collapse due to a widespread lack of liquidity. These whispers had been gaining credence since Bankia, one of Spain’s largest retail banks, announced at the end of last month, that it had a €19bn hole in its balance sheet which needed to be plugged. The Aussie Dollar also came under selling pressure, as investors shied away from risk, taking the GBP AUD exchange rate back into the 1.5700s before Friday’s market close.
The weekend shut-down in the currency markets saw a major development, with the eurogroup of Finance Ministers announcing on Saturday that it was making up to €100bn of emergency funding available to Spain’s troubled banks. The market’s immediate response to the news was positive, with Asian shares registering healthy gains during yesterday’s session and the Australian Dollar opening almost 1c higher against the Pound than its Friday close. However, appetite for risk rapidly drained from the market during yesterday’s session, as analysts questioned whether the Spanish banking sector’s debts might represent the tip of an insurmountable eurozone debt iceberg. These fears were evidenced by spiralling interest rates on Italian bonds at the start of this week.
GBP AUD remains a long way off its near-term high of 1.6187, which it reached on 23rd May. In spite of the slight upward move for the pair since Friday, the general trend remains to the downside. Consecutive closes below yesterday’s near-term interim floor of 1.5505, which was triggered by the post-Spanish bailout euphoria, would be required in order to confirm that the downtrend had been re-established.
Summary of major upcoming data releases that we think may move the market.
- The AUD came under further selling pressure in the middle part of last week
- The Canadian Dollar came under selling pressure in the early part of the week
- The Canadian Dollar was strongly supported against the Pound during the early part of last week’s trading session
- Weaker than anticipated New Zealand labour market figures, released in the middle part of last week’s session, caused pronounced selling pressure on the Kiwi Dollar.
- Pound to Australian Dollar Forecast: The Pound’s recent rally against the Australian Dollar is rapidly running out of steam