Foreign Currency Market Update – GBP / AUD Update
After hitting a succession of multi-year highs earlier in 2015, the Pound Sterling to Australian Dollar (GBP/AUD) exchange rate has spent the last few weeks reversing previous gains. The past five days alone have seen Sterling fall from 2.1722 against the ‘Aussie’ to 2.1256 as central bank interest rate hike speculation remains the dominant force behind market movement.
At the close of last week the commodity-driven Australian Dollar advanced on a number of its peers as demand for higher-risk assets spiked following the publication of the latest US Non-Farm Payrolls report. The data disappointed on all fronts, detailing a considerably smaller-than-projected increase in positions, stagnant wage growth and a drop in the participation rate. With the previous month’s figures also being negatively revised the report left the odds of a 2015 rate adjustment considerably lower and triggered a US Dollar sell-off.
The ‘Aussie’ largely held Friday’s gains over the weekend and weathered a decline in Australia’s AiG Performance of Service Index on Monday. The gauge of the nation’s services sector slipped from 55.6 to 52.3 in September but still remained above the 50 mark separating growth from contraction.
Later in the European session, the GBP/AUD exchange rate fell to a low of 2.1362 with the Pound suffering as a result of the UK’s below-forecast services PMI. News of the successful negotiation of the Trans-Pacific free trade deal lent the Australian Dollar additional support and the currency powered higher still in the wake of the Reserve Bank Australia’s (RBA) interest rate announcement.
The RBA left borrowing costs on hold and the tone of the accompanying commentary left investors betting that a policy of steady interest rates will be pursued until the close of the year.
RBA Governor Glenn Stevens stated; ‘In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate […] The Australian Dollar is adjusting to the significant declines in key commodity prices.’
As the week progresses the Pound could fall further against the Australian Dollar if upcoming Industrial/Manufacturing Production reports for the UK fall short. Investors will also be focusing on the Bank of England’s (BoE) policy meeting and accompanying meeting minutes. While the central bank is extremely unlikely to make any alterations to fiscal policy at this juncture, the minutes may show whether recent events have made policymakers more dovish on the timeline for increasing interest rates. If the vote on borrowing costs is undivided it will weigh on the Pound, but a split vote (particularly a 2-7 or 3-6 split) would be Sterling supportive. Australian ecostats with the potential to trigger GBP/AUD movement over the next few days include the nation’s AiG Performance of Construction Index and Investment Lending/Home Loans figures.
Heads Up
Summary of major upcoming data releases that we think may move the market.