Foreign Currency Market Update – GBP / AUD Update
In spite of some volatility, the past week has seen the GBP/AUD exchange rate generally appreciating in value as the ‘Aussie’ has been buffeted by negative global headwinds originating from further evidence of China’s economic slowdown.
Tuesday saw the antipodean currency take a substantial hit as the Chinese Imports figure for September was revealed to have contracted far more sharply than forecast, with the level of imports sinking by -20.4% on the year. As this indicates that demand for commodities from the world’s second largest economy is weak, the data set base metal prices into a fresh slide, pulling the ‘Aussie’ down with them.
The Pound was previously pressured lower by the UK’s surprise return to negative inflation. The UK’s latest Consumer Price Index clocked in at -0.1%, which led to speculation that the Bank of England (BoE) would not be under particular pressure to raise interest rates in the near future, discouraging investors from piling into the currency despite a general move away from riskier commodity-correlated currencies.
This negative trend for Sterling was reversed, however, on Wednesday as a raft of UK employment data led to a renewed boost in BoE rate rise hopes. While the Jobless Claims Change figure failed to show improvement, instead demonstrating a 4,600 rise in unemployment claims, the ILO Unemployment Rate unexpectedly fell to its lowest level in seven years at 5.4%. Combined with a continued increase in Average Weekly Earnings, albeit at a slightly slower pace than anticipated, this prompted economists to suggest that a rate hike could be in store in order to keep interest rates in line with domestic wage growth.
The antipodean currency was not particularly supported by the publication of the latest Australian Employment Change report, which showed that the number of employees within the domestic economy had fallen by -5,100. Increased talk of a December interest rate hike from the Fed towards the end of the week, supported by a better than expected US Consumer Price Index and vastly improved University of Michigan Confidence Index, also kept the ‘Aussie’ soft.
Monday saw the release of China’s third quarter GDP report, which prompted a somewhat mixed reaction from investors. Although the figure was marginally stronger than the 6.8% forecast, this still demonstrated that the world’s second largest economy was growing at its slowest rate since 2009, failing to particularly ease wider slowdown concerns. As commodities once again took a hit, this prompted the ‘Aussie’ to slide further, weighed down by speculation that the Reserve Bank of Australia (RBA) could be spurred to slash interest rates in order to support the domestic economy.
Despite investor fears, however, the October RBA meeting minutes released overnight indicated that policymakers are not especially keen on the idea of cutting interest rates below the current multi-year low. The relatively hawkish tone of policymakers pointed to the evidence that the Australian economy was rebalancing, reducing the impact of the mining sector upon wider national growth.
This rally could be sustained if tonight’s Westpac Leading Index prints strongly, with the antipodean currency also likely to benefit from any dovishness that may be evidenced in upcoming speeches from members of the Federal Open Market Committee (FOMC). Should the odds of a 2015 Fed rate hike remain limited, this could spur the GBP/AUD exchange rate into a fresh downtrend.
Heads Up
Summary of major upcoming data releases that we think may move the market.