Foreign Currency Market Update – GBP / AUD Update
The Australian Dollar declined against the Pound (AUD/GBP) and the US Dollar (AUD/USD) after Greece voted ‘No’ to austerity.
For a significant period of time the Reserve Bank of Australia (RBA) stated that Australian Dollar overvaluation was having a detrimental impact on economic growth. Domestic businesses have struggled due to a lack of foreign investment and cooling demand for Australian exports. The RBA has already intervened in the markets by reducing the benchmark interest rate, but the ‘Aussie’ (AUD) resilience has proven costly. The last rate cut only managed to stoke a growing housing bubble in Sydney; reducing the central bank’s tools for intervention. With that being said, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate reached a five-year high, although that was more the result of positive British outlook rather than down to Australian Dollar weakness.
In addition to the prospect of further rate cuts and the potential fallout from the Sydney housing bubble, the Australian economy has struggled from a significant dip in iron ore prices and generally bearish commodities. The ‘Aussie’ failed to decline in response to sluggish commodity prices, however, thanks to a generally poor US Dollar performance of late. Speculation that the Federal Reserve would delay a benchmark interest rate hike until 2016 has seen the ‘Buck’ decline significantly and kept the Australian Dollar trending in a relative position of strength irrespective of commodity prices and policy shifts.
The Australian Dollar to Pound Sterling (AUD/GBP) exchange rate was trending in the region of 0.4820 on Monday, whilst the Australian Dollar to US Dollar (AUD/USD) exchange rate was trending in the region of 0.7495.
This week has seen the Oceanic currency decline after Greece voted against the austerity measures proposed by its creditors. The RBA will be hugely relieved that damp market sentiment ought to lead to a bearish period for the ‘Aussie’ as it relieves a lot of pressure on the central bank to ease policy. This means that the South pacific asset can be devalued without the potential to worsen the housing situation in Sydney and Melbourne, provided sentiment remains damp for a sustained period. If, however, Greece manages to secure a bailout deal and stay in the Eurozone, ‘Aussie’ gains may wipe out those vital losses from the current period of uncertainty.
Tuesday will see the RBA interest rate decision. Now that Greece has dampened risk-appetite, RBA policymakers ought to feel safe holding off from intervention in the hopes of natural devaluation. Other than the RBA rate decision, Australian economic data ought to be less impactful with market sentiment dominating trade. With that being said, however, Thursday’s Employment Change and Unemployment Rate have the potential to provoke ‘Aussie’ volatility.
Heads Up
Summary of major upcoming data releases that we think may move the market.