Foreign Currency Market Update – GBP / AUD Update
After a steady week of decline the GBP/AUD exchange rate was pushed into a severe slump on Friday by the shock announcement that the People’s Bank of China (PBoC) would be cutting interest rates by another 0.25 percentage points. While this initially boosted the ‘Aussie’ as risk demand surged, markets proved a little uncertain in their reaction to the news, with some investors sceptical that this monetary easing measure would prove enough to prevent a hard landing for the Chinese economy. The implication of persistent slowdown pressures, following on from the weakest Chinese GDP reading since 2009 released earlier in the week, also led to some concerns that the Reserve Bank of Australia (RBA) could be prompted into a more dovish stance.
Nevertheless, as US data has proved decidedly weak of late, the odds of a 2015 interest rate rise from the Fed have continued to recede. Given the detrimental impact such a hike and the resultant strengthening of the US Dollar (USD) would inevitably have upon the commodity-correlated and emerging market currencies, these bearish results helped to prompt a further round of general risk appetite to push the GBP/AUD pairing to a fortnightly low of 2.1108.
Following an unexpected slump on the September BBA Loans for House Purchase figure the Pound achieved a slight uptrend in advance of the third quarter UK Gross Domestic Product report. However, these gains proved short-lived upon the revelation that domestic economic growth had slowed further than anticipated on the quarter, falling from 0.7% to 0.5%. While the service sector continued to expand rapidly, outpacing its pre-downturn growth, the construction industry suffered a particularly sharp contraction of -2.2%. Prompting another dialling back of bets on the date of the first Bank of England (BoE) interest rate rise, this saw Sterling fall out of favour with investors as concerns were raised about the unevenness of the economic recovery.
Early on Wednesday morning the antipodean currency was dealt a severe blow as the third quarter Australian Consumer Price Index fell short of expectations. Year-on-year the inflation gauge remained steady at 1.5%, disappointing hopes of a modest uptick to 1.7%, while the quarterly reading unexpectedly slumped from 0.7% to 0.5%. By indicating that inflationary pressure has not mounted as pundits had hoped, this was seen to increase the likelihood that the RBA could be prompted to cut interest rates in the near future in order to stimulate the local economy.
In the coming days the Australian Dollar may be able to retake lost ground should the upcoming domestic Export Price Index show an improvement as forecast, with traders expecting the figure to rise from -4.4% in the previous quarter to 0.6%. A strong showing on tonight’s HIA New Home Sales could also prompt a resurgence for the softened ‘Aussie’, although the GBP/AUD exchange rate may continue to uptrend should UK housing data prove more hawkish. The mood does seem likely to turn bearish for the ‘Aussie’, however, ahead of next week’s RBA Rate Decision, with investors cautious over the possibility of dovish commentary from policymakers.
Heads Up
Summary of major upcoming data releases that we think may move the market.