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Australian dollar vrs Great British Pound

Written by Andrew Isbister on August 12th, 2011.      0 comments

3:15 PM (NZT) This week was always going to be one where extreme bouts of risk aversion and volatility would dominate markets. This has been the case. As a result currency moves have once again directly reflected the level of risk appetite in the market. When the risk appetite is nonexistent, growth currencies such as the AUD and NZD are dumped, and the traditional safe haven currencies, such as the YEN, CHF and USD are bought. Risk appetite this week has been driven by rumors, as much as actual substantiated comments from the key players involved in the spiraling Euro zone debt crisis.
Late Monday saw risk aversion levels at the highest point of the week, as equity markets were crushed. The AUD took a dive as a result, briefly trading to  sub AUDUSD sub 1.000, and to AUDGBP .6150 (GBPAUD 1.6393)
Rumors (that proved incorrect) that Standard and Poor’s were set to down grade French Govt debt, and that several French banks were in trouble, saw the markets in chaos.
However as the week has worn on, tough talking rhetoric from numerous Govt. officials on both sides of the Atlantic, have calmed the markets to some extent, with a bounce in equity markets and a return to some degree of the markets appetite for risk seen in the last 24 hours. This will no doubt be short lived, if the subsequent tough decisions needed are not made and acted upon quickly. Given the severity of the issues at play, and the fact that there are no quick or easy fixes (if there were we wouldn’t be in this mess), then the current “risk on risk off” trading mentality, with the subsequent massive swings in equity and currency markets, will continue for some time.
In terms of AUDGBP, this currency pair has actually been one of the more stable. Starting the week at .6350, it dived to .6150 in quick time when risk aversion was at its height, but has recovered to today be trading at back at the weeks opening levels, as equity markets have recovered overnight. Yesterdays Australian unemployment data was marginally weaker than expectation, but comments from China a short time later that were seen as supportive of growth, saw the AUD bought back strongly, as the USD was sold.
In the UK the Bank of England Inflation Report was this week’s key release event. The report was more dovish than their May Report, as was to be expected. Interest rates are likely to be on hold for longer, growth forecasts have been lowered, and further stimulus has not been ruled.
Next week will continue to be dominated largely by the markets risk appetite. With risk aversion set to continue, the AUDGBP is likely to have further downside tests at some point.
As I write we are currently trading in the interbank market at AUDGBP .6370 (GBPAUD 1.5698)