GBP/AUD Falls After RBA Announcement

GBP/AUD Drops to 2.12

The Australian dollar has gained significant ground over the last week as expectations for the US interest rate hike have been pushed back and the RBA announced no change to monetary policy on Tuesday. As a result, the Australian dollar has gained around 8 cents on the pound, dropping from $2.20 down to $2.12 in the last 10 days. The graph below highlights the movement over the last 7 days.

GBP/AUD 7 Days

The Australian dollar has benefitted significantly from a few recent rounds of poor US economic data, mast notably the non-farm payrolls figures published last week. It now looks unlikely that the US Federal Reserve will be raising interest rates this year and the Australian dollar has strengthened as a result. Regular readers of this blog will understand the inverse relationship between the US and Australian dollars. When we see a weakening of the US dollar, the Aussie tends to strengthen. When the US dollar strengthens, the Aussie will likely weaken. The recent speculation over shifts in US monetary policy have pulled the Aussie dollar from pillar to post. Why, you may be asking?

Interest rates in Australia have remained relatively high throughout the financial crisis and the Australian dollar had initially gained significantly against most of its major peers. Because the interest rates were high, the Australian dollar (and other higher yielding currencies) would benefit from carry trades, ie. investors would borrow in one currency, where interest rates were low, and invest in assets denominated in higher yielding currencies, the Australian dollar being one of them. The increased demand for the Aussie pushed the price of it up, strengthening it in the process. Over the last few months, speculation has mounted that the US Federal Reserve are close to raising the base rate in the States. This, of course, would narrow the interest rate differential between the States and Australia, decreasing the benefit of the carry trade. Demand for the Aussie has consequently weakened and so the currency has weakened too. Now that the interest rate from the States looks unlikely, the Aussie dollar has regained some of the ground that it’s lost recently.

The Reserve Bank of Australia announced on Tuesday that they would not be cutting or raising interest rates, happy with the current level of 2%. The Australian central bank had already cut rates twice earlier in the year in an attempt to weaken the Australia dollar. The policy seemed to have worked, with the AUD losing around 14% against a basket of currencies. The Australian central bank now seem to be happy with the current strength of the Australian dollar and their attitude to monetary has shifted accordingly. The RBA have now suggested that they are happy with the current price of the Australian currency,and Tuesday’s announcement came as no surprise.

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