Foreign Currency Exchange

The Aussie was stronger against a basket of major currencies last week and tested high’s of 0.9850 against the US Dollar, with many investors eagerly anticipating parity against the flailing Greenback. Bullish minutes from the RBA’s interest rate meeting earlier in the month suggested that slowing demand could curb inflation in the long-run with Governor Glenn Stevens implying that rates in the country may have peaked.

The Aussie mainly benefited from events overseas and weakness in the USD. The Central Banks in the US and Japan, where interest rates are currently 2% and 0.5% respectively, look as though they will be keeping their rates where they are for now with the Bank of Japan’s decision made last week and investors scaling down the prospects for short-term interest rate hikes in the US. This helped keep interest in the high-yielding Aussie in the form of carry trades as rates in Oz are currently 7.25%. On Wednesday we expect CPI to remain unchanged and we therefore think that rates in Australia have peaked. However with the outlook for the UK economy remaining pretty grim, with weak retail sales and final Q2 GDP figures expected this week, we should see the GBP/AUD cross sit just above the 2 Dollar mark for some time to come.