Welcome to our account of changes in the foreign exchange rate overnight, in addition to our look ahead.
1. The Australian dollar has made strong gains against the pound overnight, as solid Q1 growth in addition to job creation way above forecasts puts Australia in the limelight. In addition, the New Zealand dollar also took ground from the pound on these reports.
How come Australia has done so well?
Because, unlike Europe, it enjoys seemingly endless demand for its commodities (such as coal and iron) from Asian giant China. This helped Australia avoid recession in the 2008 financial crash, and since then has kept it insulated from the worst affects of the financial downturn.
Will the AUD keep climbing then?
For all that, probably not. This is because the Australian dollar has already made huge gains in the last 3-4 years and, even for an economy in the pink of health, there’s only so high it can go. After all, for all its good fortune Australia remains a small economy, of just 10 million people, which limits its possible rise. In terms of size, it’s not comparable to either the Eurozone nor US, for instance.
2. The euro is unchanged against the pound and USD today, as the fate of Spain (vis a vis a possible bailout) remains in the balance.
Is Spain any closer to accepting a rescue now?
Yes. Among Spanish officials, the conversation has moved on from outright rejecting the possibility of a rescue, to speculating how big such a bailout might need to be. In addition, officials in Brussels are seeking to push Spain to accept aid, by promising to limit the conditions imposed if it does so. So for instance, Spain might avoid the humiliation of having its budget overseen by IMF bureaucrats.
What happens next for Spain?
As I’ve mentioned before, I believe it’s just a matter of time before Spain accepts a bailout. Judging from the political rhetoric today, that does seem to be the case. It’s simply about enabling Madrid to save face, as and when it goes cap in hand.
3. Looking ahead, the pound could climb this afternoon, as the Bank of England announces both its latest interest rate decision, and whether to announce more quantitative easing (that would be round 4.)
Is the central bank likely to do so?
It might do, given the recent downturn in UK manufacturing, and the fact that Britain is in official recession. The problem however is that it’s not money supply that’s holding growth back, so much as confidence. The BoE can pump as much cash into the economy as it likes, but if people feel too cautious to spend it, it makes no difference. That might encourage the BoE to hold back.
What happens to the pound if there’s more QE?
It would send a signal that the UK economy needs more aid to stay afloat, which could send the pound down. On the other hand, if the BoE doesn’t act, and its rhetoric is positive, that would be a boon to sterling.
Get in touch
I do hope this post has been useful. I will return with my next update tomorrow.
If you have any questions about the foreign exchange rate or transferring money abroad in the meantime, don’t hesitate to leave a reply in the box below. I’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.