Foreign Currency Market Update – GBP / AUD Update
Tuesday morning’s surprise decision by the Reserve Bank of Australia (RBA) to trim its headline interest rate from 2.50% to a fresh record low of 2.25% left the Australian Dollar reeling. The Pound Sterling Aussie exchange rate spiked to its highest level since the Summer of 2009 at 1.9681 during the immediate aftermath of the announcement.
The Reserve Bank of Australia’s statement which accompanied the decision heaped further selling pressure on the nation’s currency, observing that the local unit, ‘remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.’
The trimming of its key interest rate will be likely to help the RBA to a certain degree in achieving its aim of attaining a weaker Aussie; however, events during the days either side of the development have made further near-term interest rate cuts from the RBA a less likely outcome. The price of a barrel of Brent Crude Oil has jumped from just above $48 during the final days of last month to end last week back above the $58 level. The increase of more than 20% in the asking price for ‘Black Gold’ was driven by data revealing a pronounced drop in the number of global applications for exploratory licenses which hints that major oil producing nations are beginning to constrict supply. If the increase in oil prices continues, triggering a renewed rise in the pace of domestic inflation, then the RBA will not have the option to increase interest rates again.
Even another strong set of American labour market numbers, published last Friday, weren’t enough to elicit any real support for the Aussie. The US data, which revealed that over 200,000 new jobs had been generated for the eleventh month in succession, was taken by investors as further evidence that the American economy may be in strong enough health for the Federal Reserve to countenance an interest rate hike before the end of the year. Such a move would spell bad news for the export-driven Australian Dollar. However, Wednesday’s announcement from another leading global central bank – the People’s Bank of China – that it would be cutting its reserve requirement ratio for domestic retail banks from 20.0% to 19.5% was better news for the Aussie. The move, aimed at increasing credit flows from the nation’s retail banks into the real economy, can only help Australia’s plentiful exporters.
Looking ahead, the big story in the global economy during the remainder of the month is likely to emanate from Athens. For a while, its recent tour of Europe’s financial capitals by Greece’s new leaders appeared to be going relatively well. However, the Syriza-led government’s continuing insistence that it wants the EU /IMF / ECB Troika to cancel half of the nation’s huge debt pile is beginning to grate with Brussels. The European Central Bank’s Thursday announcement that it will be restricting finance to the Hellenic state’s retail banks triggered an attack of jitters amongst market participants ahead of the 28th February deadline when country’s current debt deal expires. A deterioration of relations between Athens and Brussels in the lead-up to this date will be likely to send GBP AUD up towards the two to one threshold. A swift agreement would have the reverse effect, causing Sterling to ship support against the Aussie.
Heads Up
Summary of major upcoming data releases that we think may move the market.