Foreign Currency Exchange

The release of some very bearish domestic data last week increased expectations of interest cuts in Australia at some point this year. This made the Aussie lose ground against a basket of major currencies due to global risk aversion as investors are now pricing in at least two quarter point cuts over the next year.

Not only did building approvals and retail sales data come out much worse than expected but we have also seen Australian banks including ANZB Group and National Australia Bank start to disclose write downs due to the credit crunch. The Aussie also suffered due to commodities prices falling last week with further risk aversion over worries of a global economic slowdown.

We expect that the AUD could lose further ground due to short term risk aversion but considering the recent periods of extremely robust growth in Australia, a slight cooling in the economy shouldn’t hurt the currency too much. When we compare this with the current weakness in the Pound and the impending recession (according to most of the UK media!) we realise that the Aussie doesn’t look to be in such bad shape, and with the fact that the BoE will have to look at cutting UK interest rates at some point to try and stimulate growth, we still expect the GBP/AUD cross to remain range bound between 2.02 and 2.15.