Currency Forecast - Sterling Vs. Aussie Dollar 26th August 2009
In last week's update we warned that the main drivers of AUD strength were still very much in place. Sterling remains vulnerable to continued weakness as market participants fret over the possibility of further increases in quantitative easing after the Bank of England minutes revealed that three of the nine member committee voted for a larger increase than the £50bn agreed in August. These themes continue to dominate, and the exchange rate has dropped to new 13 year lows below 1.95. The next and last support level is 1.8750, the 1996 low. That is the lowest level the rate has traded since our charts began in 1991. Today's chart shows the exchange rate movement from 1993 to present.
We cannot always be as accurate as we have been lately, as forex markets can be as unpredictable as the?data flows?that drive them. Having said that, sterling looks extremely weak, and the market is lacking any clear reason to buy the pound.? Just because sterling bounced from the 1.80s in 1996 does not mean we will do so again. We therefore maintain a negative view on this exchange rate, and advise clients who have AUD requirements to consider hedging now to avoid further downside.
Currency Forecast - Sterling Vs. Aussie Dollar 20th August 2009
Sterling fell below 1.96 last week before recovering to test the 2.00 level early this week. Things were starting to look a little better after a higher than expected July inflation figure boosted confidence in the pound. The bounce was short lived though after yesterday's release of the minutes from the recent Bank of England meeting. Only six of the nine member committee voted for a £50bn increase in quantitative easing, with the other three (including influential Bank of England governor Mervyn King) voting for a larger £75bn increase.
That puts the markets on notice that further easing may be in the pipeline, casting an ominous cloud over sterling. In extending help to the economy, the Bank of England are inevitably and perhaps deliberately denting the pound. A weaker pound helps narrow the gap between imports and exports as UK goods become cheaper to foreign buyers. quantitative easing effectively pumps new money into the financial system to alleviate clogged up credit markets, but just like any other market, by increasing the supply of money policy makers risk decreasing the value of each currency unit in relation to other currencies. Central banks around the world have adopted similar QE tactics, but this week it is sterling that is in the spot light.
One new development in Australia has been a change in tone by the central bank. Whereas previously they had been referring to possible further interest rate cuts they now see the current 3% as "appropriate", which could mean the next move will be up. So the main drivers of AUD strength are still very much in place.
A rebound in investor confidence and risk appetite, plus a supportive yield. That means we still can't see any reason to abandon our negative view on this exchange rate. Markets never move in a straight line, so clients with AUD requirements should still be prepared to take advantage of any price spikes, but we would also advise considering the use of a stop order beneath the recent lows to protect against renewed weakness.
Currency Forecast - Sterling Vs. Aussie Dollar 10th August 2009
In recent updates we expressed concern that the Aussie dollar would outperform sterling as investors continue to take on additional risk in search of yield. That's exactly what we are seeing now, and the Bank of England helped to push Sterling over the edge last Thursday by increasing the size of the quantitative easing package from £125bn to £175bn. That move was well received by economists and the stock market, but not by the pound, which plunged two cents against the Aussie dollar. After a pause on Friday, we are trading another two cents lower today after a better than expected jobs report in the US gave investors another reason to buy growth assets. The exchange rate is?testing 12 year lows as I type. If we fail to rebound from here over the next few hours, we could see significant further downside, with 1.8750 being the next key support below these levels (that was the 2006 low).
We reiterate the advice in our last update. Clients are advised to cover at least half of any AUD requirement now.
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