The sterling Australian dollar rate of exchange mirrored the previous week’s trading range

The Australian dollar, like most commodity currencies, continues to trade in line with market sentiment towards investors’ appetite to buy and hold ‘riskier’ assets.

Ongoing concerns surrounding the eurozone debt crisis are not going away, with fears emerging that certain eastern European nations are now affected. Last week saw Hungary’s new Prime Minister, Viktor Orban reveal that his nation’s finances were in a “very grave situation” and that his predecessor had falsified the true state of his country’s finances.

Whilst Hungary is not the biggest economic power in the world, this news will further undermine confidence in the eurozone due to the lengthening list of nations that may need to seek emergency funding from the European Central Bank (ECB) in the future.

The sterling Australian dollar range covered a low of AUS$1.7130 and saw a high of AUS$1.7757.

The main releases from the UK saw the publication of the Purchasing Managers Index (PMI) figures, which are leading indicators of economic health and seen as a good barometer of the sustainability of the current recovery in markets around the world. The UK’s Manufacturing PMI maintained a 15-year high reading of 58 (above 50 is expansionary, below is a sign of contraction in activity) despite a small fall being forecast. The construction sector also continued its recent resurgence with a reading of 58.5 (which was marginally above expectations), while the services number – the most important of the three – was slightly down on expectations, but still strong at 55.4. All of this lends further credibility to the UK recovery gathering pace.
Elsewhere, the pound also gained on news that UK house prices rose to the highest levels in more than two years. The Nationwide Building Society said the average cost of a home increased 0.5% in May to the highest level since July 2008. They maintain their view that the current supply and demand balance in the market is still consistent, with relatively stable to modestly increasing prices.

The other main news of the week was the collapse of the ambitious attempt by Prudential to buy AIG's Asian arm. This prompted the unwinding of currency hedges put in place in anticipation of a deal, when the initial bid was announced back in March. AIG’s outright rejection of a reduced offer from The Pru’ put an end to the deal once and for all, with the UK insurer confirming that the deal was off on Wednesday. Sterling rose broadly on Tuesday as anticipation grew that the deal was close to collapse. The currency was still benefitting when the deal was finally taken off the table.

The economic conditions in Australia are now harder to read following last week’s mixed messages.
Although Australia’s retail sales rose by 0.6% during the month of April (against expectations of a 0.5% rise), this positive number was offset by news that Australian building approvals had slumped by a dramatic 14.8% during the same period.

The following day the Reserve Bank of Australia left its cash rate unchanged at 4.5% as expected. The accompanying statement from Bank Governor Glenn Stevens highlighted the fact that interest rates are now close to average levels of the past decade and are appropriate for the near term. With so many concerns surrounding the creditworthiness of several eurozone nations and how this may impact the global trade environment, the Reserve bank is now refraining from any further interest rate hikes – for the moment at least.

The Australian economy continued to grow for a fifth straight quarter, with confirmation that their gross domestic product rose by 0.5% in the three months to the end of March.

With so many factors driving the sterling Australian dollar rate, buyers of dollars should consider hedging their exposure. Whether for a one-off real estate purchase or ongoing living costs, they would be wise to fix a price for half the amount of currency they are going to need. Hedging does not guarantee buying Australian dollars at the best possible price; it guarantees not buying them at the worst.

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Foreign Exchange since 1979