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Currency transfers from Australia to the UK: the AUD/GBP pair

Written by Sam Coxhead on July 15th, 2011.      0 comments

2:45 PM (NZT) In Australia, NAB Business Confidence and WPAC Consumer Sentiment surveys both reported lower readings. In the UK worse than expected June jobless claims numbers were released. However the wild ride the markets have experienced this week, has been driven by events external to both countries.
Whilst trading has been very volatile recently, this week it has been extreme. Initially the week was gripped by fear, as the Italian Government debt situation hit the headlines. This saw a prolonged market “risk off” session. As a result risk asset currencies were hit hard. The AUD is a risk asset currency, and relative to the GBP, the start of the week saw it loose ground, trading to an interbank low of AUDGBP .6645 (GBPAUD high of 1.5048).
However overnight two announcements threw the move into reverse, with a strong risk on rally ensuing. As a result the AUD was bought back aggressively, with AUDGBP trading back to a .6728 high (GBPAUD low 1.4863). The risk on session was driven by credit ratings agency Fitch’s announcing their vote of confidence in the Italian debt situation, and an announcement by US Federal Reserve Chairman Bernanke, that he has not ruled out further easing methods, if conditions warranted. So basically he put quantitative easing (QE) back on the table. QE (the electronic pricing of money to stimulate growth) is inflation positive, growth positive, commodity price positive, and USD negative. So fear of Europe debt dissipated, the market turned optimistic, and risk assets were again in demand.   
Yes this was supportive of the GBP as well, but relative to the AUD, it lagged. This is because as a barometer of global growth and confidence, the AUD will always react to a far greater extent to such announcements, than the GBP will.
So overall the AUDGBP remains elevated, but more because of the weak USD story, than that of a strong Australian economic story. However the weaker stream of Australian data has continued. Not so long ago the market was anticipating an interest rate hike from the Reserve Bank of Australia in early 2012. The current pricing now suggests that this has changed, and an interest rate cut, is the more likely, in late 2011.
Therefore whilst the current levels perhaps remain justified, it is difficult to see further AUDGBP appreciation (GBPAUD depreciation). If anything, given the current set of inputs, and assuming the possible QE comment from Fed Chairman Bernanke won’t be backed up by action, current AUDGBP levels are beginning to look like they may have peaked.
The current interbank rate is .6647