Australian Dollar Loses More Ground Against Pound, Outlook Determined by Heavy Support Layer
Three days of gains for the Pound to Australian Dollar exchange rate further solidify the October floors and we expect further consolidation over coming days.
At the time of writing GBP/AUD is at 1.6083, about 0.30% higher than where it started the day.
If these gains can stick then this will be the third consecutive day of advances which could signal the recent stabilitiy in the exchange rate is becoming more entrenched.
Furthermore, the pair has not closed below 1.59 at all in October which suggests it is a region of support that can be depended on in the short-term and we would anticipate any weakness to be met by buying interest around this level.
There are however concerns that this relative stability in the Pound is technical in nature with strength coming as traders take profit on their bets against the currency.
If anything, the fundamental outlook overwhelmingly supports further AUD advances.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0112▼ -0.24%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9428 - 1.9509 |
**Independent Specialist | 1.9831 - 1.9911 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Australian inflation and a surge in iron ore prices this week confirm the background mood music behind the AUD remains upbeat.
Data shows that prices in Australia are rising at a faster rate than analysts had expected.
Inflation has risen by 1.3% so far this year with one-quarter left to go.
Assuming a similar rate of rise in Q4 it will result in an annualized rate of between 1.7-1.8% which is just below the Reserve Bank of Australia’s 2.0% target.
With inflation, so close to target the data extinguishes any residual expectations of a 2017 interest rate cut from the RBA, make it probable rates will stay at their current 1.5% level.
Australia to Retain Interest Rate Advantage
The prospect of Australia's interest rates staying at current levels are certainly a positive.
The Aussie has been one of the best-performing currencies of recent years owing to the ability of investors to borrow in low-interest rate currencies such as the Euro (0.0%) and investing in a higher interest rate currency such as the Aussie (1.5%); the investor pockets the different – 1.5%.
This 'carry trade' has created substantial inflows into Australia pushing up the value of the Aussie Dollar in the process.
According to UBS this dynamic is likely to continue for the foreseeable future, even if the Federal Reserve starts to raise interest rates in the US in December.
Their thesis is that on balance interest rates will probably remain ‘lower for longer’ even if the Fed makes a hike in December and that this will continue to buoy interest in the carry trade.
Iron Ore’s Sudden Leap
Also supportive of the Australian Dollar is the sudden surge in iron ore prices, to well above the 60 dollars per ton mark.
Iron ore is Australia's biggest export, and therefore matters greatly for the exchange rate as higher prices for iron result in rising foreign exchange income.
The commodity has risen 4.9% on Chinese exchanges in the last 24 hours after major producers announced they were cutting production.
This, combined with an increase in the price of coking coal which is used in the production of steel, has pushed up the price of steel, which indirectly has benefited iron ore.
Coal is Australia's second-largest export, which again is supportive of the Aussie.
