Latest Specific Currency Report Sterling Vs. Aussie Dollar - 25/02/10
Last Last week's shock government borrowing figures hit the pound on Thursday, and that decline was exacerbated Friday after poor retail sales data. Sterling took another dive on Tuesday after gloomy comments from Bank of England governor Mervyn King suggested a possible return to Quantitative Easing if the economic recovery falters. It seems the BoE are sticking to their unstated but all too obvious strategy of talking sterling down to help boost exports. They may be unable to contain the budget deficit, but a weak pound is one way to improve the trade deficit.
The Sterling/Aussie rate fell to record lows below 1.71 on Tuesday before embarking on a small bounce. That bounce reached 1.74 briefly, but has now run out of steam. The most likely scenario is a decline to new lows over the next few days. Buyers of the Aussie dollar should hedge at least half of any requirement now to reduce risk, and those with time on their side may want to take a "wait and see" approach on the balance. The next key calendar event is the Reserve Bank of Australia meeting on March 2nd. Minutes of the February meeting suggested that further rate hikes are still very much on the agenda.
Latest Specific Currency Report Sterling Vs. Aussie Dollar - 12/02/10
Since our last update the Aussie dollar has regained its footing somewhat. Stock markets have bounced slightly, there is some optimism that a rescue package for Greece will be forthcoming, all is calm for now. That has resulted in some mild selling of the US dollar and yen as the flow of money into those "safe haven" currencies dries up. The high yielding currencies including AUD have benefitted and are once again the flavour of the month.
In Australia, very strong employment data pushed the Aussie dollar sharply higher yesterday, increasing the chances of another interest rate hike at the next RBA meeting scheduled for March 2nd. Most analysts are expecting a 0.25% rate hike, bringing the benchmark rate to 4%. That tempting yield will help underpin the currency unless we see a resumption of the dramatic stock market selling of yester-week.
The technical outlook is deteriorating rapidly. We are now approaching the last two support levels at 1.7330 (October low) and 1.7260 (Jan' low). Clients should strongly consider covering any AUD requirement now, or placing a stop order below 1.7260 to protect against the rate falling out of the trading range that has been in place since October.
Latest Specific Currency Report Sterling Vs. Aussie Dollar - 05/02/10
Stock markets fall, dragging higher yielding currencies lower... Bank of England halts QE, for now.
Extract from our January 26th update:
"...weighing on sentiment toward the high yielders is the dramatic stock market sell off seen over the last few days. If that trend continues and develops into panic, we could see severe weakness in currencies like AUD, NZD and the Rand. Buyers of these currencies should therefore be on alert for opportunities."
Stock markets rebounded slightly early in the week, but took a major drubbing yesterday, falling to three month lows. The market has been left punch drunk by the latest sell off, and every indication is that investor fear levels are starting to rise. This is exactly the sort of catalyst that could spark a dramatic unwinding of the so called "carry trade", where investors have borrowed in low interest rate currencies like USD, JPY and even GBP, and sold those currencies to buy AUD.
As the Australian dollar starts to weaken, traders may dump the currency as their losses mount, causing further weakness. That's precisely what caused the unprecedented moves back in October 2008 when the Sterling/Aussie rate hit 2.70. Clients with AUD requirements need to remain cautious in case markets calm down and the Aussie regains its poise, but we should also recognise that there could be good buying opportunities in the short term.
The most sensible advice we can offer would be to cover half of any requirement here, or consider placing a stop order below 1.7750 in case the rate drops. On the upside, we are approaching some major technical resistance levels, which is not to say sterling cannot overcome these if the situation develops as described above. If you have a target exchange rate in mind, it is worth placing a limit order at that level in case we see a short lived spike. That will maximise your chance of achieving your target rate.
The big news this week is that the Bank of England have opted not to extend the £200bn asset purchase facility that was designed to increase money supply in the banking system. The bank were faced with a decision between bolstering the somewhat anaemic economic recover, and stoking inflation after recent data showed inflation hitting 2.9%, well above the bank's 2% target. Over all sterling has shown little reaction to the widely expected outcome, trading flat against the euro, and falling against an overtly strong US dollar.
On the other side of the globe, policy makers kept Australian interest rates on hold. Traders had been expecting another rate hike to 4% (current rate 3.75%) and in the absence of that were inclined to sell the Aussie dollar.
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