John from Moneycorp

Australian dollar update 04/10/2011

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    Global economic sentiment drives the Aussie dollar, just as it does everything else in financial markets. When the outlook is positive, the (potential) increase in demand for Australia's coal and minerals takes the currency higher. And vice versa. There was a bit of both last week, but mostly it was an extension of the AUD's retreat that cost it 6% of its sterling value in September. Nervousness about a bankrupt Greece – and about what that might mean for the world economy – has dampened demand for the Australian dollar.

     

    Nor has the dollar received much help from the Australian ecostats. New home sales showed a 1.1% improvement in August but, after a cumulative fall of -16.2% in the preceding three months, it wasn’t much consolation. More worrying was a further one-point decline in the AiG performance of manufacturing index to 42.3. Anything below 50 means falling activity – and 42.3 is a worryingly low number, that increases the likelihood of an interest rate cut before the year is out.

     

    From the UK perspective, it is worth bearing in mind the possibility of quantitative easing (QE) – if the Bank of England release further QE in the near future, this is likely to have an adverse effect on sterling against all major currencies. Thursday’s monetary policy committee meeting will confirm if (or when) QE is occurring.

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    Further to the post above, The Bank of England today said it will inject a further £75bn into the UK economy through quantitative easing (QE). The Bank has already pumped £200bn into the economy by buying assets such as government bonds in an attempt to boost lending by commercial banks.

     

    The last time QE took place was in 2009 – recently there have been calls for further QE to aid the fragile recovery as global growth has slackened - therefore this threatens the UK economy (e.g. exports).

     

    Thanks

     

    John

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