Foreign Currency Market Update – GBP / AUD Update
Last week the Pound Sterling to Australian Dollar fluctuated between highs of 2.1989 and lows of 2.1529 as investors pushed back Bank of England (BoE) interest rate hike expectations in the face of slowing UK services growth.
The GBP/AUD pairing also responded to a poor Chinese Manufacturing PMI, the Reserve Bank of Australia’s (RBA) decision to leave interest rates on hold and the pace of Australian growth slowing markedly on both the quarter and year in the three months through June. Other Australian data showed an improvement in the nation’s Performance of Service Index and a narrowing in the Australian trade deficit but an unexpected month-on-month decline in retail sales.
However, despite the mixed results the GBP/AUD exchange rate was able to close out the week in a stronger position and consolidate gains over the weekend as a reduction in US joblessness bolstered Federal Reserve interest rate speculation. Although the US Non-Farm Payrolls report revealed that the world’s largest economy added fewer-than-forecast positions in August, the unemployment rate fell from 5.3% to 5.1% (thanks to a dip in the participation rate) and average earnings increased. The results were viewed as being generally supportive of the case in favour of the Fed introducing higher borrowing costs at some point this year and commodity-driven currencies declined accordingly.
Over the weekend the ‘Aussie’ derived some modest support from both optimistic commentary from the Governor of the People’s Bank of China (PBoC) regarding the stock market correction being almost complete and a return to growth for Australia’s AiG Performance of Construction Index. However, the Shanghai Composite Index continues to look vulnerable this week and the Australian Dollar has subsequently weakened once more.
While UK data is in short supply until later in the week, the Pound Sterling to Australian Dollar exchange rate is likely to experience volatility as a result of China’s latest trade report (due out tomorrow) and Australia’s employment figures for August. Further signs of Chinese economic weakness may weigh on the ‘Aussie’ but any AUD declines against peers like USD and GBP may be limited if Australia’s unemployment rate falls from 6.3% to 6.2% as forecast. That being said, the dip in joblessness is expected to be due to a fall in the participation rate rather than a substantial increase in Employment Change.
Developments in China will, of course, continue to have a major impact on demand for currencies like the Australian, New Zealand and Canadian Dollars, as will Federal Reserve interest rate hike bets.
In terms of UK news, the developments most likely to cause fluctuations in the GBP/AUD exchange rate include the UK’s Manufacturing/Industrial Production numbers, growth data for August, the BoE’s latest interest rate decision and the central bank’s 12-month inflation expectations. Last week’s run of disappointing British data led to speculation that the BoE might leave interest rates on hold until the third quarter of next year, so any reports which add fuel to this particular fire can be expected to put the Pound under pressure.
Heads Up
Summary of major upcoming data releases that we think may move the market.