Unless you’ve had your head in the sand for the past month, you’ll know that on June 23rd the UK will be voting over its future within the European Union. Regular readers of this report will also know that the recent weakening of the pound is the result of the uncertainty over the outcome of the aforementioned referendum. Rather than covering old ground, in today’s report we’ll focus on recent movement in some of our other most commonly traded currencies, namely the commodities dollars, i.e. the Australian, Canadian and New Zealand currencies.
Exchange Rate Graphs
Last week, the Australian dollar rose to its highest level against sterling in over nine months, dropping below $2 to the pound and settling around $1.95 at the close of business on Friday. Of course, the recent weakening of the pound has had a significant part to play in the currency pair’s movement, but the Australian currency has been performing well in its own right. The price of iron ore jumped over 6 percent on Monday, strengthening the Aussie in the process, pulling GBP/AUD down below $2 for the first time since early 2015. Those with a keen eye on the Australian currency will know of the link between the ferrous metal and the strength of the dollar. Iron ore is Australia’s main export, most of which finds its way to Chinese factories, and any fluctuation in its price will have a similar effect on that of the Aussie. The price of iron ore has now risen 18% since the turn of the year, after hitting a six-year low back in December.
The Canadian dollar has also been performing well recently. GBP/CAD traded above $2 for much of last year, but is now comfortably trading in the low 1.90’s. Over the course of 2015, the Canadian dollar had been driven down by low oil prices, the threat of another interest rate cut from the Bank of Canada, and a generally weak economic outlook. However, there has been a dramatic shift in sentiment since the turn of the year and the Loonie is now one of the best performing major currencies, gaining nine percent against its counterparts since mid-January.
Historically, the strength of the Canadian currency has been linked to the price of oil, in the same way that the Aussie will move as the price of iron ore fluctuates. The recent recovery in the oil price has had a similar impact on the price of the Canadian dollar, driving it up in the process.
“The recovery in oil prices has clearly been a positive influence on the Loonie, yet a part of purchases are also, and increasingly, explained by the narrowing divergence between the Fed and the BoC,” said Ipek Ozkardeskaya, an analyst at London Capital Group.
It’s been a similar story for the Kiwi dollar, also strengthening significantly against the struggling pound. The Kiwi has risen in line with the other commodities currencies, but its recent rise has mainly been the result of events in the States and the predicted direction of future monetary policy from the Federal Reserve. Like the Aussie, the New Zealand currency often benefits as investors search for higher yields. With the global economic slowdown, it’s become apparent that the Federal Reserve are now in no hurry to raise interest rates again. With this in mind, investors have moved away from US dollar denominated assets, looking for investments with higher returns. The Kiwi has been one of the main beneficiaries as New Zealand government bonds offer some of the highest yields of any developed nation and the local currency has strengthened accordingly.
The only data release of any significance today will be the publication of the latest inflation figures from the Eurozone at 10am. The numbers could shed some light on the possible outcome of the ECB’s next monetary policy meeting, with some analysts predicting another cut to the deposit rate or an extension to the quantitative easing programme if the inflation figures continue to disappoint.