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AUDGBP(GBPAUD) a lot less volatile than previous weeks.

Written by Andrew Isbister on August 18th, 2011.      0 comments

1:45 PM (NZT) So far a significantly less volatile week in currency markets, than the prior two. The AUDGBP interbank range has only been .6345 - .6424 (GBPAUD  1.5566 - 1.5760). As a percentage, that’s a 1.2% range this week, as opposed to the 6.5% range last week, and the 6.5% also seen in the latter half of the prior week also.  
Whilst the issues that sent the market into chaos two weeks ago still remain very much unsolved, the level of volatility in the market in general has settled down a lot quicker than expected. With volatility driven by the markets “risk on risk off” mentality having abated at present, a the currency markets attention has returned to domestic data releases to some extent.  
In this regards the Australia the Reserve Bank of Australia (RBA) released their monetary policy meeting minutes earlier this week. These revealed that whilst they are still considering an interest rate increase, the softer economic outlook globally means their official cash rate currently remains on hold at 4.75%. However this meeting was held prior to the events of the past two weeks. The interest rate market is now expecting the RBA to cut interest rates by a full 1%, before the end of this year. Given it is the interest rate differentials between countries that has such a big bearing on the level of currency pairs, and given there now is such a divergence between what the markets is expecting, and what the RBA are indicating, there is the potential for the AUD to react very strongly to economic releases in the short term, as the implied interest rate outlook becomes clarified. If it becomes evident the interest rate outlook is higher than the market is currently pricing, this could lead to AUD appreciation.
In the UK the Bank of England (BOE) also released its monetary policy meeting minutes this week. They were more “dovish” than expected, with the minutes revealing the committed had unanimously agreed to keep the official cash rate at .5%. Whilst the BOE has indicated if downside risks to the economy materialise, a further round of quantitative easing (QE – basically the electronic printing of money) may be warranted, only one of the nine member committee feels this is needed at this point.
UK inflation numbers Tuesday came in higher than expected, labour market data overnight  weaker than expected. Tonight UK retail sales data will be released. This will be of particular interest, as it will provide a good indicator as to how UK consumer spending is holding up, now that the UK Govt austerity measures are starting to bite.  
Overall however these releases have had little impact on the AUDGBP rate, with the current rate very much where it started the week. Obviously the global growth outlook, that has been significantly been reduced in the past two week, remains a key driver, along with the interest rate differentials between Australia and the UK.
On Friday next week, the annual Central Bankers Symposium in Jackson Hole in the US starts. Some commentators are picking the US may announce some monetary policy initiatives. Any announcements of this type will have a major bearing on currency rates. If they are seen as supportive of global growth, the Australian dollar will more than likely benefit far more so than the GBP.  
Currently as I write, we are trading in the interbank market at AUDGBP .6370 (GBPAUD 1.5698)