The Pound to Australian Dollar exchange rate shot-up by over 0.35 cents within five minutes of the latest Australian GDP report earlier this morning. GBP/AUD hit a fresh 1-year high of 1.5929 as the One-Trillion-Dollar economy was shown to have expanded by just 0.6% in the first quarter, compared to estimates of 0.7%. The weaker-than-anticipated print brought the annualised growth score down from 3.1% to 2.5%, missing forecasts of a slightly stronger 2.7%.
The underwhelming GDP reading added to the ‘Aussie’ Dollar’s woes following a dovish statement from the Reserve Bank of Australia just one day earlier. The RBA stated that it was prepared to introduce additional monetary easing measures in the future, should policymakers deem it necessary:
“The inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand”.
RBA Governor Glenn Stevens also mentioned that the Australian Dollar remained overvalued, bemoaning the negative effect that the strong domestic currency has been having on the nation’s exports.
In response to the dovish RBA policy statement the Australian Dollar was subject to some significant sell-offs on the currency market as investors priced-in the possibility of another interest rate cut in the near future. James Knightley of ING said:
“With the growth outlook looking more troubling and inflation not an issue, we see the possibility of more rate cuts, predicting another 25 [basis point] move [in the third quarter]”.
Sterling climbed against the ‘Aussie’ Dollar
Sterling climbed higher by around 2.1 cents against the ‘Aussie’ Dollar yesterday in response to the damning verdict from the RBA and the unsatisfactory performance of the Australian economy during the first three months of 2013.
Interest rate cuts are seen to damage the appeal of the Australian Dollar to speculative traders because they reduce the yield (profit) on assets denominated in the Antipodean currency.
James Knightley of ING also predicted that the downtrending Australian Dollar, which has already plummeted -9 cents since April 14th, could fall as far as 0.95 against the US Dollar in the near-term:
“Furthermore, the RBA may consider that they can exploit current broad commodity forex weakness by executing further rate cuts, thereby pushing the Australian Dollar below 95 US cents”.
Knightley’s prediction appears to be coming true as the Australian Dollar to US Dollar exchange rate (AUD/USD) shed another -1.4 cents yesterday to reach a daily low of 0.9605.
A separate report showed that the AiG Performance of Australian Services fell from 44.1 to 40.6 in May. The poor score, which fell almost 10 points below the crucial 50.0 level that separates growth from contraction, points towards further subdued economic performance in the second quarter and heightens the possibility of further Central Bank intervention from the RBA.
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