Currency Forecast - Sterling Vs. Aussie Dollar 11th December 2008
The Australian dollar has strengthened significantly since our last update, rising to the highest level against sterling since mid November as equity markets remain stable and world interest rates fall. While the Australian dollar interest rate has been cut to 4.25%, sterling rates are now 2%, so the yield advantage of holding AUD remains relatively unchanged.
The Reserve Bank of Australia cut rates by 1% on December 2nd, closely followed by the Bank of England, again by 1% on December 4th. Other news helping the Aussie dollar was jobless Today's Economic Data overnight which shows that employers cut 15,600 jobs in November, in line with expectations. That leaves unemployment at 4.4%.
According to a survey by the Confederation of British Industry released at 11am today, British Industry is mired on one of the worst periods since 1980. The index of manufacturer's output improved slightly from November's reading, but sterling dropped sharply on the release, which confirmed a pessimistic outlook.
The technical outlook remains negative for sterling. We are now approaching support at 2.2200 then 2.2000, and a close below the latter would be an indication that the market could head back to 2.1000.
Currency Forecast - Sterling Vs. Aussie Dollar 27th November 2008
The pound has enjoyed a modest rebound against the Euro and US dollar over the last few days, but is struggling to make headway against the resurgent high yielders as stock markets bounce sharply and risk aversion starts to dip. Fear and risk aversion has been the dominant theme for the GBP/AUD exchange rate lately, but with global stock markets unlikely to resume October's extreme plunge (baring a new financial melt down), we expect risk appetite will gradually return, helping high yielding currencies outperform.
Sterling remains especially vulnerable as woeful economic data continues to pile up, making further interest rate cuts more likely in the near term. The Bank of England are meeting again on December 4th. Meanwhile, the Reserve Bank of Australia meets on Tuesday December 2nd.
The technical outlook remains negative. Trend resistance is seen around 2.3800, and it would take a daily close above 2.4335 to suggest an end to the current downward trend. The next key support is 2.2210.
Currency Forecast - Sterling Vs. Aussie Dollar 17th November 2008
The Aussie dollar has continued its recovery since our last update on November 7th. We were expecting AUD to climb further as long as stock markets could avoid another panic sell off like the one witnessed in October. Stocks have been sliding again, but on nothing like the scale we saw then, so the high yielders (AUD, NZD, Rand) have been taking things very much in stride.
Grim comments from the Bank of England Wednesday have helped push sterling lower again. The recent 1.5% interest rate cut had been seen as a possible one off move likely to have put the prospect of further rate cuts on the back burner. However, in the last few days the markets have started factoring in further cuts in the near future, triggering a further bout of pound selling. Meanwhile, Australian interest rates have been cut by 2% in 3 separate moves since September 2nd. Another half point cut is expected on December 2nd, bringing rates to 4.75%, still considerably higher than the headline UK rate of 3%, making AUD a relatively attractive currency.
All in all the GBP/AUD technical outlook is still negative. Almost all of the October gains have now been erased, and it would take a new break above 2.3800 to reverse the recent downward trend.
Currency Forecast - Sterling Vs. Aussie Dollar 7th November 2008
"The GBP/AUD rate is now testing the 2.4000 support level that marked the lows last week. Given the fact that financial markets appear to be stabilizing, it is likely that AUD would continue to strengthen." - 30th October
We don't always get it right, but in the case of the high yielders over the last few weeks we haven't been far off. The Aussie dollar has continued to rebound from the desperately oversold levels we saw a few weeks ago. Those levels were the result of extreme panic in the financial markets, panic that is now settling. Fear levels simply cannot remain so high for sustained period, as traders/investors who are in "flight" mode usually do their selling fairly quickly, and inevitably start to feel better once risk has been reduced or eliminated. The US volatility index has dropped back from a high of 89 to 58 today. We're looking at three charts in today's update.
The first two are very similar, charting the GBP/AUD rate, then the volatility index (widely known as the fear index). As you can see, high levels of fear are strongly correlated with the AUD weakness we saw in October. The third chart shows the US Dow Jones stock index. This is basically the first two charts in reverse. As stock prices fall, so does AUD, and up goes the VIX!
What next? Well, it seems unlikely that we will see another bout of selling like October. As long as stock markets don't slide back into freefall we should see a relatively firm Aussie dollar.
On another note, many traders were left scratching their heads after the pound remained firm on yesterday's unexpectedly large 1.5% interest rate cut. The logical reaction would be sterling weakness, but in this case the pound is taking comfort from the fact that further rate cuts are now unlikely in the short term, and this decisive action may actually help the economy.
Currency Forecast - Sterling Vs. Aussie Dollar 30th October 2008
In last week's update we talked about the two factors likely to impact the Australian dollar. The carry trade, and stock markets. Here's a reminder of what we said;
....much of the selling of high yielders was driven by forced unwinding of "carry trades", where investors borrow Yen (at 0.5% interest) and change the currency for AUD, NZD or Rand, earning a higher interest rate over the life of the loan. This strategy paid dividends over the last few years as high yielders rallied against the Yen, but when investor risk aversion hit fever pitch this month that trend reversed sharply as carry trade liquidation resulted in heavy buying of the Yen (to repay loans) and selling of the Australian dollar..... with the carry trade hopefully now largely out of the equation, the primary factor affecting AUD is the health of global stock markets..."
Since then the stock markets have rebounded sharply (the Dow Jones up 15% from the recent lows) and as expected, the Australian dollar and other high yielding currencies have also rallied as risk appetite returns to the market. The GBP/AUD rate is now testing the 2.4000 support level that marked the lows last week. Given the fact that financial markets appear to be stabilizing, it is likely that AUD would continue to strengthen.
Currency Forecast - Sterling Vs. Aussie Dollar 23rd October 2008
The extreme volatility of the last few weeks has settled somewhat, with first tier high yielders such as the Aussie and Kiwi dollars finding support from heavily oversold levels. Having declined over 25% in the first few days of October the Aussie now stands only 10% lower on the month. Unsurprisingly the low for AUD roughly coincided with the stock market lows posted on 10th October after the panic triggered by the credit crisis.
During this rout the US volatility index reached levels never yet seen since records began in 1990. Much of the selling of high yielders was driven by forced unwinding of "carry trades", where investors borrow Yen (at 0.5% interest) and change the currency for AUD, NZD or Rand, earning a higher interest rate over the life of the loan. This strategy paid dividends over the last few years as high yielders rallied against the Yen, but when investor risk aversion hit fever pitch this month that trend reversed sharply as carry trade liquidation resulted in heavy buying of the Yen (to repay loans) and selling of the Australian dollar.
So, with the carry trade hopefully now largely out of the equation, the primary factor affecting AUD is the health of global stock markets. Yesterday's heavy falls on the Dow Jones resulted in another sharp rise in the volatility index, but among the high yielders AUD and NZD held relatively firm in contrast to events a couple of weeks ago. That could be an indication that the correlation between weak stocks and weak high yielders is breaking, and that AUD will continue to strengthen in the next few weeks, or may at least not fall quite as sharply as stock markets if the latest stock sell off continues.
Currency Forecast - Sterling Vs. Aussie Dollar 13th October 2008
The last two weeks have seen the most unprecedented volatility in currency markets as investors struggle to assess the risks posed by the banking meltdown. High yielding currencies were sold indiscriminately, leading to a collapse in AUD, NZD and the Rand. The wild intra-day swings have made picking a good trading rate almost impossible, but the good news for AUD buyers is that we are still trading at extremely elevated levels, providing an excellent opportunity to buy the currency.
The Aussie started to bounce back overnight as the Reserve Bank of Australia took the step of guaranteeing all bank deposits for the next three years. Wholesale funding will also be guaranteed in order to free up credit markets and bolster confidence. These measures mean that investors may start moving assets back into the Australian currency, in particular the carry trades, where traders borrow in low yield currencies (principally the Yen) and invest the proceeds in high yielders.
The technical outlook remains extremely volatile, and guessing the next move is exactly that...A guess! However, with fear in the markets having already reached unprecedented levels last week, and with the measures taken by the RBA, we could see the GBPAUD rate drop back to more normal levels if global stock markets can continue this morning's bounce.
Currency Forecast - Sterling Vs. Aussie Dollar 30th September 2008
The Australian dollar weakened yesterday after the dramatic failure of the US financial "bailout" plan at the House of Representatives. Lawmakers blocked the plan, leaving the crisis unresolved, sending the US stock markets sharply lower. High yielding currencies have come under pressure as you would expect, but not to the extent that we saw two weeks ago. Much of that selling (of AUD, NZD) was based on the unwinding of so called "carry trades" (where investors borrow in low interest rate currencies and invest the money in higher yielding currencies), and this time around the Aussie dollar is taking things more in stride.
The GBP/AUD rate could still go higher, but based on the weaker correlation between falling stocks and the high yielders, we would see this rally as an opportunity to lock in a better exchange rate (if you are buying AUD), or establish a lower limit in the market (known as a stop order) to protect against the rate falling back. Levels of stock market fear measured by the US volatility index are now reaching unprecedented extremes, which strongly suggests that we will see stocks rebound soon.
It's hard to predict whether we've seen the worst, but typically highs in the volatility index tend to coincide with lows in the stock market. With investor fear now at such extreme levels (and therefore appetite for high yielders low) we could see AUD rebound along with stocks if that proves to be the case.
Currency Forecast - Sterling Vs. Aussie Dollar 22nd September 2008
Last week's financial rollercoaster caused extreme volatility in the currency markets as investors struggled to interpret the latest events and allocate capital accordingly. Today's sterling/Aussie chart shows the impact on the Australian dollar as traders aggressively sold the currency along with other "high yielders" while stock markets plunged around the world. High yielding currencies are most vulnerable to bouts of stock market weakness as capital is withdrawn from assets perceived as high risk, and reallocated to more stable currencies. This correlation can be seen by comparing our first chart (GBP/AUD) with the leading US stock index (second chart) over the same period.
Stock markets rebounded strongly after the US and UK authorities imposed a ban on "short selling" activity for certain financial stocks (short selling is where traders speculate on falling stock prices by selling stock they do not own in the hope of buying back cheaper and realising a profit), and the US administration announced a $700bn plan aimed at absorbing questionable mortgage related assets from vulnerable financial institutions in order to lessen the risk of further collapses and bolster confidence in the markets. Unsurprisingly, as stock markets rallied in response to the package, so did the Australian dollar, which has now regained almost all of last week's early losses.
The technical outlook for the GBP/AUD exchange rate is now negative. The strong reversal from last week's panic sell off means we have probably seen a major low in stock markets, and therefore a major climax in the selling of high yielders. The Australian dollar is now likely to continue to strengthen as long as stock markets retain a positive/sideways bias. Given the strong correlation between stocks and the Australian dollar right now, it's also worth noting that the US volatility index (an index that measures levels of investor fear) reached levels that are commonly associated with long term market bottoms during last week's rout. That further reinforces our view that the worst is now behind us, which is good news for investors, but not so good for clients looking to buy the Australian currency.
Currency Forecast - Sterling Vs. Aussie Dollar 4th September 2008
The Reserve Bank of Australia cut interest rates by 0.25% this week in a widely expected move. The currency initially weakened as traders reduced "carry trades", where currency is borrowed in a low interest rate territory and re invested in another currency offering a higher yield. Much of the carry trade is funded by the Japanese Yen which carries an interest rate of just 0.5%. After the initial rally from 2.10 to 2.15 on the announcement, subsequent weakness in AUD has come mainly overnight, reflecting the fact that the AUD selling is coming from the Asian session.
We have interest rate decision from the Bank of England today. Most analysts expect policy makers to keep rates steady at 5%, so in the unlikely event of a cut, sterling would be expected to weaken significantly. The technical outlook for GBP/AUD remains negative after the big reversal from 2.20 in August. The market would need to close above 2.15 to open the possibility of further gains and another test of 2.20.
Currency Forecast - Sterling Vs. Aussie Dollar 22nd August 2008
In our last report on August 13th we highlighted the negative reversal in the GBPAUD rate, having rallied strongly over the last few weeks. The rate subsequently dropped several cents, and we remain of the opinion that further downside is likely over the coming days. Sterling has been knocked by a gloomy Bank of England report, and the Aussie currency is now strengthening further, driven by a rebound in commodity prices, led by gold and oil. Also helping AUD was a release of minutes from the August 5th Reserve Bank meeting which appear to point towards a delay in any interest rate cuts. Markets expectations of a cut were largely responsible for the weakness in the currency through late July and early August.
The technical outlook remains negative following the recent reversal, which came about from a key technical resistance level around 2.2000.
Currency Forecast - Sterling Vs. Aussie Dollar 13th August 2008
Severe weakness in commodity prices, in particular the gold price, has been weighing on sentiment toward the Aussie dollar over the last two weeks. Also contributing to sharp falls in the currency is the increasing expectation that the Reserve Bank of Australia will cut interest rates in the coming months.
We turned positive on the GBPAUD rate following the break above 2.0950 on July 30th. Having seen a strong rally from those levels over the last two weeks there are now signs that the trend may be running out of momentum. This morning saw a strong surge higher, which has now largely reversed, so we could see further downside from here if the market closes in negative territory today. Buyers of AUD should consider taking advantage of the recent gains by locking in current rates.
Currency Forecast - Sterling Vs. Aussie Dollar 8th August 2008
The Aussie dollar has continued its slide following the break above technical resistance at 2.0950 last week. Strong signals from the Reserve Bank of Australia that interest rates will soon be cut have put the currency under selling pressure as investors who bought the Aussie for it's relatively high 7.25% yield are now selling and moving funds into other currencies. The initial weakness is causing a momentum effect as more traders are forced to sell as the Aussie continues to fall. This is presenting an excellent opportunity for buyers of AUD, who can either lock in current rates or place limit orders in the market at a target exchange rate. Conversely, buyers who are looking for further gains should consider placing a stop order* to protect against the risk of a reversal.
Currency Forecast - Sterling Vs. Aussie Dollar 4th August 2008
In last week's report we noted that a close above 2.0950 would give sterling a technical boost. That's what happened, and the exchange rate surged higher into the end of the week as traders continued to sell AUD and NZD on the basis that interest rates in both countries (particularly in NZ) will be cut over the coming months. The Reserve Bank of Australia meet early Tuesday morning (05:30 UK time) and are expected to keep rates on hold at 7.25%, with an easing bias. There's an outside chance of a 0.25% cut but this appears remote.
The US Federal Reserve meet on Tuesday (19:15), and we're expecting interest rates to be kept on hold at 2%. The accompanying statement will be important for future direction, and may have an impact on the carry trade as investors judge the outlook for US Vs AUD/NZD yields.
The Bank of England also meet on Thursday, and are widely expected to keep interest rates sharply unchanged at 5%.
The market has given back Friday's gains, but the technical outlook remains positive as long as the rate continues to hold above 2.0950. A close back below this level would likely indicate a renewed slide toward the 2.0350 lows.
Currency Forecast - Sterling Vs. Aussie Dollar 30th July 2008
Weak economic data has pushed AUD lower since last week's update, and the Sterling/Aussie rate is now testing key technical resistance around 2.0900/2.0950 (based on interbank rate). A close above here today would give sterling a technical boost and suggest possible further gains in the short term. Given that the long term trend is still down, this rally may present an excellent opportunity for buyers of the Australian currency. Clients should consider placing limit orders to maximise the chance of achieving a favourable exchange rate.
Currency Forecast - Sterling Vs. Aussie Dollar 24th July 2008
The Australian dollar plunged yesterday as an interest rate cut in New Zealand dented the appeal of the higher interest yield offered by both currencies, driving traders to sell out of so called "carry trades". Carry trades are where investors borrow in a low interest rate currency (the Yen at 0.5% for example) and invest the proceeds in currencies paying a higher rate of return. This accounts for much of the strength in AUD and NZD over the last year or so. The Reserve Bank of New Zealand cut rates by 0.25% to 8% on Wednesday and signaled further rate cuts as the economy slows. Analysts were divided over the prospect of a cut because inflation reached 4% in the second quarter, higher than expected and well above the bank's 3% target.
Both currencies weakened sharply, and the GBP/AUD rate is now trading towards the upper end of the recent range. Technical resistance is seen around 2.0950, and given the sharp rally this would be a good time for AUD buyers to place a stop order* in the market to protect against renewed weakness, while still having the opportunity to benefit from any further upside.
Currency Forecast - Sterling Vs. Aussie Dollar 11th July 2008
Sterling has been listless over the last few days as the Bank of England kept interest rates on hold at 5% yesterday. This was widely expected, and traders will be waiting for the minutes of the meeting in ten days to see how policy makers voted.
Meanwhile, AUD and NZD have strengthened over the last 24 hours as the chances of a US rate hike recede. Treasury Secretary Henry Paulson commented that markets will take "additional time" to fully recover from the home loans crisis. No rate hike in the US would mean that Australia and New Zealand will retain a hefty interest rate advantage, prompting speculators to buy these currencies for the higher yield.
The technical outlook is negative. Having bounced off key resistance around 2.0900, the market is heading back toward the 2.0300 lows set in May and June. A break below here would open the way to further losses, with 2.0000 the next support level. The outlook therefore remains gloomy unless new data can help sterling stage a recovery. At present this appears unlikely.
Currency Forecast - Sterling Vs. Aussie Dollar 30th June 2008
Severe falls in the US stock market prompted traders to sell out of high yielding currencies last week, resulting in weakness for AUD, NZD and the Rand. This helped the market rally back up toward the June highs, but we ran out of momentum on Friday, and the Australian dollar is now strengthening once more. The Reserve Bank of Australia meet overnight Tuesday, and are widely expected to keep interest rates on hold at 7.25%. However, policy makers are expected to retain a bias toward further rate hikes considering the continued inflation pressure. This could help AUD remain on the front foot over the next 24/48 hours.
Currency Forecast - Sterling Vs. Aussie Dollar 20th June 2008
Economic data has been mixed this week. First we had unexpectedly high inflation figures in the UK. Despite the usual association of high inflation to higher interest rates, sterling fell on the news as traders focused on the negative economic implications. Then yesterday retail sales data came in well above expectations, rising 3.5% on the month compared to a forecast 0.1% decline.
This gave the pound a boost against the Euro and US dollar, but the high yielding currencies like AUD, NZD and ZAR were also in demand, leaving the GBP/AUD rate relatively unchanged. We are trading slightly lower again this afternoon, and a look at the chart shows that the resistance level around 2.0900 has been keeping a lid on things this week. This was also a major resistance level back in mid May, and considering the trend is still down, we would require a close above 2.0900 before becoming optimistic of further upside.
In the short term we remain very cautious and suggest that clients with AUD requirements consider locking in the recent gains, or placing stop orders below the current rate to secure a "worst case" exchange rate should the market deteriorate.
Currency Forecast - Sterling Vs. Aussie Dollar 10th June 2008
The Sterling/Aussie rate rallied to its highest level in 4 weeks yesterday...
Producer Price Inflation in the UK reached the highest level in twenty years according to figures released yesterday. This is certainly bad news for the economy, but gave sterling a boost as it makes any cut in interest rates very unlikely. The pound rallied across the board, making its strongest gains against high yielding currencies which were weaker after comments from US Treasury Secretary Henry Paulson suggesting that currency market intervention is not "off the table" should the US currency continue to slide. Futures markets are now pricing in a 30% chance of the Fed' raising interest rates from the current 2% level at the August meeting, up from just a 10% chance before yesterday's comments.
Yesterday's upside momentum has run out of steam overnight, and the market is sliding back. However, we could still see further gains if traders continue to sell out of high yielders. Clients with AUD requirements should strongly consider placing a stop order in the market to protect against a renewed slide in the exchange rate. Meanwhile, we will continue to monitor the situation.
Currency Forecast - Sterling Vs. Aussie Dollar 30th May 2008
The Australian economy is walking a tightrope between higher inflation and slowing growth, making interest rate policy increasingly difficult to predict. In our last report we noted comments from the Reserve Bank indicating the possibility of further rate hikes as inflation remains "uncomfortably high". On the other side of the argument we have a new report from JP Morgan predicting that Australia's economy probably contracted during the first quarter for the first time since 2000. High borrowing costs are biting into consumer demand and business investment. However, given the strong performance of commodity prices (which account for around 60% of Australia's exports) some analysts are predicting further strength for the currency.
Meanwhile, the pound is still struggling to find favour in the markets, and the GBP/AUD trend is still negative. The next key technical support level is 2.0000. Clients with AUD requirements should therefore consider trading now, or placing a stoploss order in the market to protect against further downside.
Currency Forecast - Sterling Vs. Aussie Dollar 20th May 2008
The Aussie dollar rallied to a 24 year high against the US dollar yesterday, and an 11 year high against sterling, driven higher by the release of the minutes from the latest Reserve Bank of Australia meeting, at which board members spent "a considerable time" discussing interest rates. Markets had taken last week's weak wage growth figures as a sign that interest rates had peaked, but the RBA minutes cited inflation as "uncomfortably high", and the length of the meeting confirms that the policy bias is still for higher rates in the short term. The board held rates steady this time on the basis of the substantial tightening already in place, and uncertainty over the slowing economy.
Strong commodity prices are also helping AUD.
Currency Forecast - Sterling Vs. Aussie Dollar 14th May 2008
The Australian dollar has been strengthening over the last week as investors continue to buy the currency, attracted by the 7.25% yield, and the increased likelihood of further interest rate hikes after strong inflation data. However, a report this morning showed wage growth in the country is far lower than analysts had feared, rising 0.9% in the first quarter compared to 1.1% expected. This has reduced expectations of further rate increases, and put the currency into a sharp retreat this morning.
The technical outlook is still negative unless we can capture the 2.1000 level. A close above here would give sterling a technical boost, opening the way to further gains. Clients should be cautious however, because the trend is clearly down. One strategy that AUD buyers may want to consider is placing a stop order beneath yesterday's low (based on the interbank rate @ 2.0590) to protect against renewed weakness.
Currency Forecast - Sterling Vs. Aussie Dollar 6th May 2008
The Reserve Bank of Australia held its monthly board meeting this morning, and elected to keep interest rates unchanged at a 12 year high of 7.25%. Recent inflation data has been way above the central bank's target range, prompting speculation that interest rates may rise again later this year. Strong demand for the high yielding currency has caused the Sterling/Aussie rate to drop to fresh 11 year lows in the last few hours. Clients with AUD requirements should strongly consider buying now to protect against possible further losses.
Currency Forecast - Sterling Vs. Aussie Dollar 24th April 2008
The Aussie dollar surged to an 11 year high yesterday after data showed an unexpected jump in core inflation, which rose at the fastest pace in 17 years in the first quarter. The data means the Reserve bank will probably have to keep interest rates at 7.25% for some time to come, or may even have to raise rates again later in the year. The next central bank meeting is May 7th.
The technical outlook has deteriorated sharply in the last 24 hours. We have now broken below the February low around 2.0950, and the downtrend is reasserting itself. The next significant support level is the key psychological 2.0000 zone, which provided support back in 1997. Clients with AUD requirements should consider trading now to avoid further downside. It takes a close back above 2.1000 to improve the technical outlook from here.
Currency Forecast - Sterling Vs. Aussie Dollar 18th April 2008
Sterling found broad based support yesterday as the government moved to implement measures to help the struggling interbank lending market. Banks have been wary of lending to eachother, leading to a credit crisis that has far reaching implications for the UK mortgage market. Now the Bank of England is finalizing plans to allow banks to exchange mortgage based assets for Treasury gilts in order to restore confidence and kick start interbank lending.
Another key aspect of this plan is that it could alleviate the credit crunch without necessarily requiring further interest rate cuts, bolstering the appeal of sterling as an investment.
The technical outlook for GBP/AUD had been deteriorating over recent weeks following the failure to hold above 2.20 in mid March. The return to the 2008 lows was met with a strong bounce yesterday, reinforcing the 2.0950 area as a key support level. As long as we trade above here, we are cautiously optimistic that further short term gains are possible. All depends on whether the deeply oversold pound can continue the current rally.
Currency Forecast - Sterling Vs. Aussie Dollar 9th April 2008
Sterling fell sharply yesterday after a Halifax house price survey revealed a 2.5% fall in March, much more than the 0.4% decline expected, and the largest drop since 1992. This brings the annual pace of house price growth right down to 1.1%, and increases the chances of an interest rate cut from the Bank of England tomorrow (Thursday). Gordon Brown made some blunt remarks to the BBC yesterday, saying that interest rates can be cut, because inflation is low. In fact, inflation remains well above the 2% target rate that Brown set when he made the Bank of England independent in 1997.
The technical outlook has deteriorated markedly over the last 3 days. The break of trend support and yesterday's acceleration to the downside put us within lunging distance of the 2008 lows below 2.1000. Clients with short term AUD requirements should consider fixing their rate here, ahead of the Bank of England decision.
Currency Forecast - Sterling Vs. Aussie Dollar 3rd April 2008
The Aussie dollar gave up early gains this morning and is now trading slightly lower against sterling after an overnight report showed new weakness in the job market, an indication that recent rate hikes have dampened domestic demand. Interest rates are at a 12 year high of 7.25%, and analysts have been expecting one further rate hike to 7.5% around the middle of this year. There may be a further erosion of this expectation if we see more data confirming a slowdown, in which case AUD may continue its recent retreat.
Next Thursday's Bank of England meeting is expected to result in a quarter percent interest rate cut. Bank of England head of markets, Paul Tucker said in a speech yesterday "the broad policy strategy is to offset some but not all of the adverse shock to demand from tighter credit conditions". In other words, the central bank will provide some relief to the slowing economy and shaky housing outlook, but will also remain mindful of rising inflationary pressures.
We are still cautiously optimistic based on the technical outlook. A close below the mid March lows around 2.1350 would certainly be a cause for concern however, calling the recent uptrend into question. On the upside, a break above the March highs at 2.2135 should signal a continuation of the recent rally.
Currency Forecast - Sterling Vs. Aussie Dollar 27th March 2008
Sterling made solid gains against the Australian dollar last week, closing above 2.20 for the first time in eight weeks. Since then we have given back some of the gains, making small daily moves to the downside as strong commodity prices and positive comments from the Reserve Bank of Australian governor help the Aussie regain lost ground. RBA governor Glenn Stevens said the country's banking system is "weathering the storm" caused by volatile credit markets. Meanwhile, comments from Bank of England governor Mervyn King yesterday suggesting further scope for interest rate cuts knocked sterling lower, though the losses were largely erased by the end of trading.
UK GDP and Current Account date is released tomorrow at 09:30. The next RBA meeting is April 2nd, and market watchers are divided over the outcome. Recent positive comments from key officials suggest scope for another rate hike to 7.5% by the middle of this year.
The technical outlook improved slightly with last week's close above 2.2000. Sterling needs to hold above the trend support around 2.1600 in order to maintain the positive short term trend.
Currency Forecast - Sterling Vs. Aussie Dollar 12th March 2008
Yesterday's surprise $200bn measures by the US Federal Reserve to help relieve the pressure on credit markets has caused a sharp reversal in the GBP/AUD exchange rate. Investors rushed back into high yielding ("riskier") currencies as stock markets rebounded from the lows.
The rejection of the 2.2000 resistance level is a negative technical development, and could signal an end to the recent rally. Clients with AUD requirements are advised to exercise caution. If you need to fix your exchange rate, or wish to protect against further downside.
Currency Forecast - Sterling Vs. Aussie Dollar 11th March 2008
The Aussie dollar has remained weak since last week's Reserve Bank announcement on interest rates. The bank increased rates to 7.25% but signaled that this would be the last hike for some time amid growing evidence of a slowing economy. Heightened levels of investor risk aversion have also hampered AUD as weak stock markets continue to stimulate a move away from high yielding currencies which are generally perceived as more risky. The key US Dow Jones stock index is now flirting with the lows set during the stock rout in January, so fear levels could increase if we break these levels, sending AUD lower.
Wednesday sees the release of UK trade balance figures and the Budget speech at 12:30.
The technical outlook has improved following the breakout from the clearly defined trend channel we have been monitoring over recent weeks. A close above 2.2000 would be another positive development since it would break the series of lower highs that form the basis of the downtrend.
Currency Forecast - Sterling Vs. Aussie Dollar 5th March 2008
The Aussie dollar declined yesterday as data pointed toward a slowing economy in the fourth quarter of 2007. Assistant bank governor Malcom Edey cited "significant dampening forces", leading to a narrowing of the yield advantage the currency maintains over the US dollar. Higher interest rates in Australia have helped dampen domestic demand, so the market is now expecting a pause in any further rate increases after yesterday's 0.25% rate hike. This brings the benchmark lending rate to 7.25%, the highest in 12 years.
The technical outlook is still negative, and the market is trading within a clearly defined trend channel. Resistance is seen around 2.1750, then 2.2000 which marked the high in February (price failed to clear this level three times in Feb').
Currency Forecast - Sterling Vs. Aussie Dollar 27th February 2008
The Australian dollar has strengthened further as gold prices continue to soar to new highs, and speculation increases that the US Federal Reserve will cut interest rates again at the March 18th meeting. Lower US rates drive funds toward higher yielding currencies such as AUD and NZD, where traders can earn a better return. The Australian dollar currently has an interest rate of 7%, 4% higher than its US counterpart. If the Federal Reserve cut rates by another 0.5% in March as expected, the yield gap will widen again.
The technical outlook remains poor. The market has been testing support at 2.1150, and a break below here opens the way toward the next key level at 2.0000.
Currency Forecast - Sterling Vs. Aussie Dollar 18th February 2008
The announcement of Northern Rock's nationalization sent sterling lower again this morning, and the GBP/AUD rate is now trading at a new ten year low. The next significant support level is 2.1150, where we gained a foothold back in mid 1997. Below there, 2.0000 is the next likely stop. Sterling is still under pressure against most major currencies as fears of further asset write downs persist among the major banks. Even firm inflation data has so far failed to give sterling any support. Meanwhile, the Reserve Bank of Australia raised interest rates by 0.25% to 7% on February 5th, making the currency even more appealing to international investors. With commodity prices also flirting with record highs, it's not surprising to see the Aussie dollar well bid in the market.
The outlook for GBP/AUD remains negative.
Currency Forecast - Sterling Vs. Aussie Dollar 14th February 2008
The governor of the Bank of England painted a gloomy picture of the UK economy for the year ahead at yesterday's quarterly inflation report. Citing rising inflation and flat house prices, Mervyn King noted the weakness in the pound as a potential bright spot for UK exporters.
Sterling's reaction to the report was a non-event, as fears over an economic slowdown were largely offset by the comments on inflation, which suggest that price rises will limit any further rate cuts, which helped the pound to tread water or make modest gains against most other major currencies.
The technical outlook for GBP/AUD remains negative. The downtrend is still active despite this week's gains, and it would take a close above 2.2250 to improve the situation from here.
Currency Forecast - Sterling Vs. Aussie Dollar 7th February 2008
In recent reports we have been looking for the GBP/AUD rate to return to the lows around 2.1700, and this level was reached late last week. Sterling has found support here so far, and we've seen mild gains through the course of the week. However, the trend is still down, so our outlook remains negative, and we advise caution for any clients buying AUD.
The Bank of England cut interest rates by 0,25% today in a widely expected move, and the market reaction has been minimal.
Currency Forecast - Sterling Vs. Aussie Dollar 1st February 2008
The long term outlook for GBP/AUD is still negative. Interest rates are expected to rise 0.25% in Australia when the Reserve Bank meet next Tuesday, taking their benchmark lending rate to 7%, which should attract more yield seekers into the currency. Meanwhile, the Bank of England are almost certain to cut rates at the February meeting, resulting in a widening of Australia's interest rate advantage. The strong run in commodity prices is also helping AUD, which is known as a "commodity currency" due to the country's reliance on exports of gold and other raw materials.
In Tuesday's update we predicted further downside, and this remains the case. The next support level is the January low at 2.1700. The last time sterling traded below here was 1997, a year which saw the exchange rate trade below 2.0000. This will be a key support level if the market continued to deteriorate.
The only possible catalyst we can see for a rise in the GBP/AUD rate is a new bout of financial market turmoil. Even then, the correlation between weak stock markets and a weaker Aussie dollar has diminished over the last few months, as noted in our updates. Clients with AUD requirements over the next year should consider either covering their exposure here by booking a forward contract, or place a stop order below 2.1700* to protect against a fall to new lows. A stop order may be preferable for those with no immediate requirement, since it protects against further weakness without risking much from current levels, while also allowing the chance of benefiting from any rally, should it materialize.
Currency Forecast - Sterling Vs. Aussie Dollar 29th January 2008
In last week's update we were talking about how the severe falls in world stock markets were translating into weakness in the Australian dollar/better exchange rates for anyone buying AUD. Since then the market turmoil has settled considerably, and the Aussie dollar has started to strengthen again as investors dip a toe back into risk assets (which include high yielding currencies).
Last week's stock market reversal looks like it could mark a major low, as levels of fear measured by the US volatility index reached the highest level since the credit crisis last summer. High levels of pessimism are well correlated with market bottoms, and since the main driving force for AUD weakness over the last few months has been equity market weakness, we are now adopting a very cautious view of the GBP/AUD exchange rate. If stock markets continue to recover the rate will probably decline towards the recent lows around 2.1700.
Currency Forecast - Sterling Vs. Aussie Dollar 22nd January 2008
In last week's update we drew attention to the weak US stock market, and the correlation between sharp falls in stock prices and weakness in high yielding currencies like the Aussie/ Kiwi dollars and the Rand. This trend has accelerated over the last few days, and massive losses for global equity markets have translated into higher exchange rates for anyone buying these currencies. This afternoon saw the US Federal Reserve respond to the market turmoil by cutting interest rates 0.75% in a surprise move. The last time rates were cut by 0.75% was 1984 !
Clients with AUD requirements should strongly consider using a stop order to protect against renewed weakness. Meanwhile, further upside in the GBP/AUD rate is likely if the global stock market plunge continues.
Currency Forecast - Sterling Vs. Aussie Dollar 16th January 2008
A renewed bout of stock market selling has seen high yielding currencies fall sharply over the last 24 hours. The correlation between weak stock markets and weak high yielders had all but vanished toward the end of 2007, but renewed fears over sub prime debt and a slowing US economy triggered the US Down Jones index to fall to 9 month lows, prompting speculation that we may be at the start of a bear market.
If stocks continue to fall sharply over the next few days this should trigger further weakness in the Australian dollar. Clients should be ready to take advantage of any spike in the exchange rate. One way to minimize risk from here would be to place a stop order below yesterday's low at 2.1700. This allows you to ride any continued upside, while guaranteeing a "worst case" exchange rate if the market falls back to new lows.
Currency Forecast - Sterling Vs. Aussie Dollar 11th January 2008
Sterling fell yet further yesterday, despite the Bank of England holding interest rates steady at 5.5%. After an initial rally, the pound fell to new lows as traders focused attention on the increased probability of a rate cut in February. As prospects for US interest rates also point to the downside over the first half of 2008, high yielding currencies such as AUD and NZD are looking increasingly attractive. Meanwhile, the stock market wobbles that caused the heavy selling of these same currencies last summer are failing to have a similar effect these days. We noted the weakening of this correlation in November 2007.
Australia's statistics office will report fourth quarter consumer price index on January 23rd, and New Zealand will report their equivalent measure of inflation on January 17th. Both of these figures are expected to confirm inflationary pressures, increasing the likelihood of the next move in interest rates being UP. The Aussie dollar currently enjoys a 2.5% yield advantage over the US dollar.
The technical outlook remains negative. Following the reversal from trend resistance in Nov'/Dec', the market has now broken below key support at 2.2200. This was a level we highlighted in late 2007. Sterling is now trading well off the day's lows, and could even close positive today, though it takes a close above 2.22 to improve the technical outlook. Buyers of AUD should consider placing a stop order beneath today's low* (2.1745) in order to limit the risk of renewed weakness.
Currency Forecast - Sterling Vs. Aussie Dollar 3rd January 2008
The Australian dollar has been strengthening again as the yield premium on short dated bonds widened against comparable US bonds as investors increased bets on further interest rate cuts in the US. Meanwhile the Aussie dollar is benefiting from higher interest rates (which rose by 0.5% to 6.75% last year) and the expectation that rates will rise by another 0.25% over the coming months. Against a backdrop of falling rates here in the UK, it's not surprising to see the exchange rate dropping. This could continue as traders continue to seek better yields than those currently offered by the US dollar and sterling.
The next major technical support is the October 2007 low at 2.2200. A break below here would suggest further deterioration.
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