Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 18/08/10
Falling stock markets and rising risk aversion have helped “safe haven” currencies like the US dollar and Japanese Yen over the last week. A natural consequence of the US dollar strength is weakness in smaller economies currencies that are perceived by investors as more risky. That usually impacts the high yielding currencies the worst, allowing Sterling and the Euro to actually show some gains against the Aussie dollar, Kiwi dollar and South African Rand. However, during last week’s stock market weakness Sterling failed to make any headway, and it actually fell sharply yesterday after data confirmed that consumer price inflation moderated to 3.1% in July from 3.2% in June. That makes it less likely that Bank of England policy makers will raise interest rates any time soon, damaging Sterling’s investment appeal. The exchange rate fell by a couple of cents to 1.72. Sterling has recovered a cent today after the minutes from the latest BoE meeting showed that one of the nine strong committee did in fact vote for a rate hike. Andrew Sentance has been a lone voice for a few months now, calling for a rate rise while the 8 other members vote for interest rates to remain at record lows.
Uncertainty ahead of this Saturday’s Australian election has helped keep the Aussie dollar range bound, but clients with Aussie dollar requirements should take a cautious approach and either hedge their exposure ahead of the weekend, or place a stop order below the market to protect against a post election rally in the dollar. When uncertainty is removed, currencies typically strengthen.
We are still trading in a five cent range between 1.7050 and 1.7550. If we break out of that range we should see some proper movement.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 12/08/10
Falling consumer confidence and house prices are stoking growing alarm at the prospect of a double dip recession. As the new government introduced the prospect of sweeping budget cuts ratings agencies applauded and sterling rallied, but the signs are that consumers took fright and confidence in the recovery was immediately dented.
The Pound has been in a holding pattern against the Aussie dollar over the last two weeks. The big news this week is that both the US Federal Reserve and the Bank of England gave gloomy economic updates and cut growth forecasts. The dollar rallied strongly as investors bought it for its safe haven credentials, selling almost any other currency in order to buy dollars. It’s the usual risk aversion story. Sterling did gain a cent yesterday as traders cut Aussie dollar positions slightly more than Sterling holdings, but so far we are not seeing the sort of spike in the Sterling/Aussie rate that we have seen during previous sharp stock market corrections. The question now is whether the stock markets will continue to fall, and if they do, will we see a rout in the high yielding currencies like we saw in May when the exchange rate rallied by 15 cents (8.5%) in just a few days. It takes a large dose of investor fear to stoke that sort of move.
A higher than expected unemployment reading may keep the Australian central bank on the sidelines for the rest of the year. The headline unemployment rate rose to 5.3% from 5.1%. A general election next week is also likely to keep the Aussie dollar in volatile mood, not least because the polls are showing an unexpectedly tight race between the governing Labour party and the Liberal party.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 26/07/10
The pound bounced by six cents from July 12th to July 19th, but gave back those gains last week, making a new four week low on Thursday. Retail sales data for June beat expectations but had little impact on Sterling. Things looked a little better on Friday as the much awaited European bank stress tests showed only 7 banks failing to make the cut, with all the UK banks passing. That helped sterling put on a couple of cents against the US dollar as traders saw good reason to buy the pound and move money away from the dollar. Second quarter GDP figures showed the UK economy grew at 1.1% in the second quarter, an improvement on the 0.3% first quarter figure and much better than analysts had expected. The pound rallied against all other major currencies, but gains against the Aussie were limited to just one cent.
The Aussie dollar has also been benefitting from US dollar weakness as investors continue to take on more risk and buy high yielding assets. Australian inflation figures due out on Wednesday (consumer prices) may heap further pressure on the Reserve Bank to raise interest rates again at their next meeting on August 3rd. The RBA said in its July meeting minutes that it would be monitoring the European stress tests and local inflation conditions in deciding whether to raise rates from their current 4.5% at the August meeting. Given the positive stress test result, futures markets are now pricing in a 30% chance of a rate hike next week compared to just 13% a week ago. That 30% may still underestimate the chance of a rate hike next week if Wednesday’s inflation data is stronger than expected.
The technical picture is mixed. Sterling failed to make the most of the June rally by attacking the key 1.8300 level marked in red on our chart. Since that rejection the pound has been on the back foot, and the prior trend history and fundamentals seem to support a resumption of the down trend. Our only caveat is that Sterling’s tentative short term up trend is still intact until we break the previous low at 1.6750. Those clients with Aussie dollar requirements and appetite for risk may want to hold out until we break that level before throwing in the towel. For those without the stomach we would advise hedging at least half of any exposure now.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 14/07/10
After a bad start to the month further downside pressure is building from several directions this week. On Monday credit ratings agency S&P warned that Britain is still at risk of losing its AAA credit rating due to high levels of debt. Then there were comments from MPC member Adam Posen who said that the country is at risk of sliding back into recession. Add to that some dreadful first quarter trade figures which showed a £9.62Bn deficit, double what analysts were expecting. The only “good” news was that the final reading of first quarter GDP was unchanged at 0.3%, but that only went to underline the fragility of the recovery, leading to fears that austerity measures will push the economy back over the brink.
The Pound managed to tread water yesterday after the latest inflation figures for June showed a higher than expected rise, up 3.1% from a year ago. This was hardly market moving stuff, but in the context of recent declines it helped. Higher inflation could lead to higher interest rates in due course, but this figure was not strong enough to warrant much attention.
Meanwhile, the Aussie dollar is drawing strong support from a sustained rebound in stock markets. The increase in risk appetite has prompted investors to view the currency as a good bet offering a strong 4.5% yield. Data flow has also been supportive as unemployment dropped to 5.1% in June, and an index of consumer sentiment rose strongly from June to July. All of this has economists calling for another rate hike in August, further boosting the investment case for the currency.
Having plunged by ten cents from the highs the Sterling/Aussie rate looks like it is heading back to earth with a bump. The strong correlation with stock market performance remains intact, and time and again we have seen the Aussie dollar sag briefly as stock markets wobble, only to rally back up to make new highs. This is the most likely outcome now, so although the current exchange rate is several cents off recent highs, it should also be pointed out that we are also ten cents above the May lows. This looks like a good time to hedge half of any Aussie dollar requirement.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 02/07/10
Markets greeted the UK's emergency budget with relief last week, bidding up the value of sterling as fears of a credit downgrade receded in light of positive initial comments by ratings agencies and economists. While making cuts that may dent economic activity, the new government also produced a set of modest 5 year growth projections that markets can believe in, and a plan to reduce borrowing from 10% of GDP to 1% over the same period. That the budget was not as bitter a pill as many expected did not dent the general perception that the government is taking action to address the deficit and by doing so putting the pound on more credible footing and preserve the UK's all important AAA credit rating.
The Sterling/Aussie rate was given a second shot of adrenalin as world stock markets took a major dive last week, driven lower by fears of a Chinese and US slowdown. A string of negative US data including jobless claims and poor manufacturing numbers meant that US stocks closed at a new 8 month low last night, stoking fears of a deeper correction that could keep investors looking for safe havens over the near term. That sense of investor risk aversion sent the Aussie dollar sharply lower over recent days as traders sell high yielding currencies and move money into the Yen and US dollar, a phenomenon known as a “flight to quality”. This reaction has been seen several times over the last few years. Every time the markets hit a major hurdle, the Aussie dollar plunges.
However, so far it has always recovered to post new highs against both sterling and the US dollar once the fog clears and investors renew their search for a decent yield (The Aussie dollar offers 4.5% compared to just 0.25% in the US and 0.5% in the UK). Taking of interest rates, last week's Bank of England minutes showed that one of the nine member committee that sets interest rates actually voted to increase rates by 0.25% at the June meeting. Andrew Sentance was alone in wanting to raise rates, but it still gave markets the feeling that rates in the UK may go up in the foreseeable future, and that helped sentiment toward the pound.
The technical outlook for Sterling is positive in the short term. We have finally managed to make a “higher high” on the chart by breaking above the early June high of 1.79. That's not enough to call this rally a new uptrend, but it does open up the possibility of an attack on the key resistance barrier around 1.8350. A break above there would be a more significant development requiring a reappraisal of the longer term charts. Clients with Aussie dollar requirements should strongly consider hedging at least half of any exposure now while the going is good; or for those with appetite for risk, placing a stop order below 1.70 would limit the risk while allowing you to ride any further rally. Given the Aussie dollar's persistent tendency to bounce back after this sort of setback, we advise taking action to benefit from the improvement and protect yourself against losses. Speak to your account manager to discuss your options in more detail.
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