Australian Dollar vs Pound Sterling Outlook: Calling the Bottom of the AUD Decline
- Written by: Gary Howes
The Australian Dollar (AUD) is powering ahead on Tuesday as markets make a fundamental shift in opinion to the outlook of the Australian dollar in 2014.
We warned yesterday that the pound sterling vs Australian dollar exchange rate was prone to further losses, however the declines in GBP/AUD being witnessed today were unexpected.
A look at the FX markets shows the Aus dollar exchange rate complex is notably firmer:
- The pound sterling to Australian dollar exchange rate is 1.4 pct in the red at 1.8374.
- The euro to Australian dollar exchange rate is 1.55 pct lower at 1.5214.
- The Australian dollar to US dollar exchange rate is 1.58 pct higher at 0.8892.
Note: Our AUD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.
UPDATE: A stark warning from Kathy Lien at BK Asset Management to those hoping for better rates on their Australian dollar purchases:
"After selling off for the past 3 months with virtually no relief rallies, we believe that the Australian dollar has officially bottomed.
"For the first time in 2 years, the Reserve Bank of Australia expressed comfort with the current level of interest rates AND their currency. By dropping their easing bias, the RBA set off a wave of short covering in the Australian dollar last night that we expect to continue in the weeks to come. In fact we are looking another 4% to 6% rally in the currency."
If you see this as being the case then we recommend you lock in your AUD purchases sooner than later.
Outlook for Australian dollar in 2014 altered by RBA shift in tone
The Reserve Bank of Australia (RBA) is responsible for the strong rally in the Aud.
"The RBA surprised the markets with relatively hawkish statement as it removed its easing bias from the communique and made no further comments about the strength of the currency," notes Boris Schlossberg at BK Asset Management.
The RBA concluded its statement with, "on present indications, the most prudent course is likely to be a period of stability in interest rates," clearly suggesting that it has now moved to a neutral bias and that further rate cuts are unlikely for the foreseeable future.
"The Aussie popped on the news, as shorts scrambled to cover their positions and the pair rose to a high of 8915 before receding a bit. The pair could see further upside as sentiment changes and could challenge the 9000 barrier as the week progresses," says Schlossberg.
The question is, why did Stevens sharply stopped targeting the Aussie at 85 cents vs. USD?
"The strongest argument against further rate cut is perhaps the inflation trajectory. Over the past 3-months the CPI y/y advanced to 2.7% (last data as of end Q4), 0.2% above the midpoint of RBA’s 2.00%-3.00% inflation target band," notes Ipek Ozkardeskaya at Swissquote Research.
This is clearly what moved the speech from “uncomfortably high AUD” to “lower Aussie will assist in achieving balanced growth”.
"The RBA's view on the recent spike in inflation will be important. If it is content to look through recent data as a temporary spike then it should be free to ease rates in 2H. Yet if it is viewed as more permanent it may give it much less room to move. With our forecast for the A$ at US$0.88 we currently take the former view," said Alex Joiner at Bank of America Merrill Lynch ahead of the RBA announcement.
We believe we will see a shift in forecasts for the Australian dollar in 2014 in response to a shift to the outlook held at the RBA.
Markets a sea of red
Meanwhile, investors retain a bearish outlook on Tuesday.
Equity markets remain a sea of red this morning, suggesting no let-up in the anxieties that have beset stocks over the past week.
Heavy losses for Asian markets followed last night’s slide in North American equities, with the Nikkei down 4% today, adding to the 10% plus loss seen since late December.
"FX markets are not playing ball though; the JPY and the CHF are under-performing rather surprisingly while the AUD is the session’s top-performer on the session so far," says Shaun Osborne at TD Securities.
