Foreign Currency Market Update – GBP / AUD Update
The past week has seen the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate experience wild fluctuations following the global stock market crash. Although Sterling has since dipped from the fresh multi-year highs struck against the ‘Aussie’ on Monday as conditions stabilised, the Pound remains in an uptrend against the Australian Dollar.
Last week, Sterling had an incredibly mixed performance against the ‘Aussie’, hitting levels not bettered since 2009 before paring gains due to a generalised lack of confidence surrounding the future of the UK economy. Sterling’s rise against the ‘Aussie’ began on August 21st after the Chinese Caixin Manufacturing PMI dropped from 47.8 to 47.1. This was a clear indicator of contraction within the Chinese manufacturing industry and as China is the main importer of Australian commodities the report had an immediately detrimental impact on the Australian Dollar. The planned closure of over 10,000 factories around Beijing was also a contributing factor towards the Australian currency’s decline; this was part of a week-long shutdown to try and improve the air quality for a commemorative parade.
The Chinese manufacturing report then led to a crash in the Asian nation’s leading stock market, with equity slumps in Europe and the US following swiftly after. Although Capital Economics Chief Global Economist Julian Jessop stated that ‘Aside from the bad news from China, there is very little to support fears of a major global downturn’, speculators clearly had different ideas. Triggered by increasing concerns over the apparent slowdown of the Chinese economy and the implications of this on the global economy, stocks and shares plunged in value for around three days straight. This crippled the Australian Dollar’s performance, sending it massively down in value against the Pound. After reaching a historic high of 2.2081 during the week, the GBP/AUD exchange rate plunged towards Friday as the stock markets returned to normality. The biggest loss for the Pound came on Friday when the exchange rate hit a low of 2.1419.
Market movement was limited on Monday due to the UK Bank Holiday but today Sterling rose against the Australian Dollar to hit a high of 2.1718 due to the Reserve Bank of Australia (RBA) freezing the Australian interest rate at 2%. The decision not to cut borrowing costs was due to RBA Governor Glenn Stevens’ ‘slow and steady’ prediction of growth for the Australian economy, although the prediction has perhaps has not adequately factored in the massive decline in influence of the Australian mining sector. The crucial point is that while mining is becoming increasingly unprofitable, no alternative Australian sector has sprung up to take its place. Regarding a future interest rate, the RBA issued the vague statement that ‘further information on economic and financial conditions to be received over the period ahead will inform the Board’s ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.’
For the rest of this week, Pound Sterling/Australian Dollar exchange rate movement may occur as a result of US ISM Manufacturing score for August, the Australian Q2 GDP figures, the Australian Retail Sales results for July and the UK Construction/Services PMIs for August. Forecasts are for a marginal decline in the US figure, a drop in the Australian GDP results, growth in the Australian Retail Sales figures and marginally increased output in the UK PMIs.
Summary of major upcoming data releases that we think may move the market.