The Reserve Bank of Australia’s minutes of its September policy meeting knocked the wind out of the Australian Dollar’s sails

The Reserve Bank of Australia's minutes of its September policy meeting knocked the wind out of the Australian Dollar's sails.The Bank’s minutes augmented speculation that there would be an increase to the £375bn currently allocated to the UK’s Quantitative Easing programme before the end of 2012, causing a broad shift out of Sterling-denominated assets.

Foreign Currency Market Update – GBP / AUD Update

The Reserve Bank of Australia’s minutes of its September policy meeting, released early last Tuesday, knocked the wind out of the Australian Dollar’s sails, taking the GBP AUD exchange rate briefly back above the 1.5600 level. The minutes proved to be surprisingly Australian Dollar negative, noting that domestic inflation was anticipated to remain between 2-3% (the RBA’s self-imposed target band), for the remainder of 2012 and into 2013. Persistently low increases to prices afford the RBA scope to cut interest rates later in 2012 in an attempt to combat slowing domestic growth and falling commodities prices, spelling bad news for the Aussie.

The Bank of England’s minutes for this month’s Monetary Policy Committee meeting, released just over 24hrs after the RBA’s version, caused a temporary easing of support for the Pound, sending the GBP AUD exchange rate back down to 1.5279, its lowest level since 29th August. The Bank’s minutes augmented speculation that there would be an increase to the £375bn currently allocated to the UK’s Quantitative Easing programme before the end of 2012, causing a broad shift out of Sterling-denominated assets.

However, the negative effect of the BoE minutes on the GBP AUD exchange rate was cancelled out by increased fears regarding the state of the global economy and several potential geo-political flashpoints as the week drew to a close. Widespread protests across 300 Chinese cities, following Japan’s purchase of the Senkaku Islands in the East China Sea, took the edge off global appetite for risk. The ‘risk-off’ trading environment was added to by weak Japanese trade figures and another disappointing set of Chinese manufacturing data, both released on Thursday, and by ongoing concerns following Spanish Prime Minister Mariano Rajoy’s weekend comments which suggested that he is considering shunning an EU/IMF/ECB bailout in favour of a debt default for the debt-ridden Iberian state. Whilst the potential for a flight to safety due to these ongoing risk events exists, a move higher would appear possible for the GBP AUD exchange rate, with the pair’s 14-week high of 1.5637, reached earlier this month, providing an initial target. Alternatively, a disappointing set of final Q2 GDP Growth numbers, due for release in the UK on Thursday morning, could send GBP AUD tumbling back down towards February’s 27-year low of 1.4555.

Heads Up

Summary of major upcoming data releases that we think may move the market.

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