John from Moneycorp

Australian dollar update 09/05/2012

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    The eight-day week cost the Australian dollar three cents against the pound, making it the second worst-performing of the major currencies (the NZD brought up the rear). A major part of the Aussie's problem was the nervousness about weekend elections in Greece and France and their possible implications for growth in Europe and elsewhere.

     

    The Australian economy itself also gave cause for concern. Purchasing managers' indices for the manufacturing and services sectors were both lower again and further into the contraction zone below 50 on their 0-100 scale. Manufacturing was four and a half cents lower at 43.9 while services slumped seven and a half points to 39.6.

     

    In recognition of economic weakness and falling inflation the Reserve Bank of Australia lowered its benchmark Cash Rate by half a percentage point to 3.75%. It was a bigger cut than investors had expected and it forced them to consider the deteriorating Australian economic picture.

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    The eight-day week cost the Australian dollar three cents against the pound, making it the second worst-performing of the major currencies (the NZD brought up the rear). A major part of the Aussie's problem was the nervousness about weekend elections in Greece and France and their possible implications for growth in Europe and elsewhere.

     

    The Australian economy itself also gave cause for concern. Purchasing managers' indices for the manufacturing and services sectors were both lower again and further into the contraction zone below 50 on their 0-100 scale. Manufacturing was four and a half cents lower at 43.9 while services slumped seven and a half points to 39.6.

     

    In recognition of economic weakness and falling inflation the Reserve Bank of Australia lowered its benchmark Cash Rate by half a percentage point to 3.75%. It was a bigger cut than investors had expected and it forced them to consider the deteriorating Australian economic picture.

     

     

     

    What would be your 6-12 month prediction for GBP vs AUD?

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    For GBP/AUD, the trend is currently towards a weaker Aussie dollar.

     

    The exchange rate, in the short term and what will happen next, is currently dependent mainly on the following factors:

     

    Eurozone situation – The Greek situation in particular causing investors to shun high yielding ‘riskier’ assets, which has proved to be negative for the Aussie dollar. The British pound on the other hand has benefitted from a relative safe haven status having retained its AAA credit rating, resulting in a flight away from the beleaguered Euro and into sterling and UK Government bonds, resulting in a higher GBP/AUD$ rate of exchange which means it is better for those converting their pounds into Aussie dollars) – if the Eurozone situation continues to deteriorate, this is likely to further weaken the Aussie dollar.

     

    Interest rates - Having seen the Reserve Bank of Australia cut its interest rate from 4.25% to 3.75% in April, the high yield advantage is now being eroded. Australia’s Prime Minister Julia Gillard has also recently stated that her government will return the budget to a surplus during the next fiscal year providing scope to adjust interest rates. Some analysts are predicting another interest rate cut in Australia soon, maybe as early as June, which again could be negative for the Australian dollar.

     

    China - Australia’s largest trade partner China has seen a considerable slowdown in economic growth recently with the most latest GDP reading down to 8.1% annualised from the previous result of 8.9% in the final quarter of 2011. Their decline in growth rate will undoubtedly dampen their previously insatiable demands for Australia’s natural resources. Considering that the Australian economy has been driven by its mining boom, the recent RBA decision to cut has been well received with the aim to help stimulate some form of domestic growth.

     

    Any data released in the Australia and the UK, of course, could have an impact on the exchange rate – much is dependent on what happens in these factors above in relation to the exchange rate over the next few months.

     

    Thanks

     

    John

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    Thanks John. Looking at historical rates, 1.60 still appears lowish, I'm hoping to move out in January and this rally in the pounds decline vs aud is cheering me up - long may it continue!

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