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Pound to Australian Dollar at 41-Month High, as RBA Mulled Cut

Market CommentaryPound to Australian Dollar at 41-Month High, as RBA Mulled Cut
Pound to Australian Dollar at 41-Month High, as RBA Mulled Cut

The pound to Australian dollar interbank exchange rate stands at 1.9079 today at the time of writing. This is its highest in three years and five months, or since June 23rd 2016.

By comparison, back on January 1st 2019, British sterling was as weak as 1.8098 versus the so-called Aussie dollar. So it’s since strengthened by 5.42%, or close to 10 cents.

This could benefit you, when you transfer money to Australia, because you might receive a higher Australian dollar total, compared to if you’d exchanged currencies in the last 41 months.

In turn, this may make it more affordable for you, if you’re emigrating to Sydney or Melbourne with your family, or if you’re making regular payments to Australia for your UK business.

To stay up-to-date with the pound to Australian dollar interbank exchange rate, visit Pure FX’s Rates & Tools page. Here, select ‘GBP’ (Great British Pound) to ‘AUD’ (Australian Dollar).

Also, to check what’s affecting the value of sterling versus the Aussie dollar recently, go to our GBP to AUD Exchange Rate Updates page. Here, click the most recent article for the latest news.

One reason why the pound has gained against the Australian dollar is because the Reserve Bank of Australia considered cutting interest rates this month, say the central bank’s meeting minutes.

Another factor why sterling has reached this 41-month high versus the Aussie is because the financial markets increasingly forecast that the Reserve Bank will further cut interest rates in 2020.

A third partial explanation why the pound has strengthened against the Australian dollar is because the Conservatives retain a large lead in the polls, ahead of next month’s UK general election.

Pound to Australian Dollar Hits 41-Month High, as RBA Considered Cut

As I mention, one reason why the pound to Australian dollar interbank exchange rate has hit its highest since June 23rd 2016 today is because, according to the minutes of the Reserve Bank of Australia’s (RBA) interest rate decision earlier this month, Australia’s central bank considered reducing borrowing costs.

This has surprised investors, as the RBA held rates at 0.75% this month.

In particular, according to the minutes of the RBA’s November 5th meeting, released this morning, the Reserve Bank saw a “case” for reducing Australia’s borrowing costs even further, reports Business Times.

This is in spite of the fact that, at 0.75%, Australia’s interest rates are already at an all-time low, as well as the fact that the RBA already eased monetary policy in June, July and October this year.

The Reserve Bank’s board considered that there was a “case” to cut borrowing costs by 0.25% to a new low of 0.5% in November, because Australia’s economy continues to underperform.

Recent economic data, including GDP (Gross Domestic Product) expansion, inflation statistics, salary increases, and employment data have all reported below forecasts, suggesting sluggishness.

To be specific, Australia’s drought recently has cut agricultural output, while the housing construction industry has slowed down too. In turn, this is prompting Australian employers to pay their workers smaller wage rises.

This gives Australian households less cash to spend at the shops, slowing GDP growth Down Under, and risking a “negative circle” of falling confidence and growth.

According to Gareth Aird, senior economist at CBA, "We view this new information and its inclusion in today's Minutes as a dovish tilt. It appears that the 'on hold' decision was not made lightly."

However, it’s worth noting that the RBA didn’t cut interest rates this month, below 0.75%. In part, this is because the Reserve Bank judged that, if it cut borrowing costs further, this may have an “adverse effect on confidence and savers”.

This is because, even though lower interest rates cut the cost of a loan, Australians might think that things have to be grim for borrowing costs to be so low.

What’s more, the RBA added that "Having already delivered a substantial monetary stimulus in recent months, there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags.”

So Australia’s central bank decided to wait for the effects of its three recent cuts to “filter through”. However, the downbeat minutes have still weakened the Australian dollar.

GBP to AUD Highest Since June 2016, as RBA Forecast to Cut in 2020

Moreover, another reason why the pound to Australian dollar interbank exchange rate has reached this 41-month high is because, looking to early 2020, Australia’s central bank is still being forecast to cut interest rates to a new record low of 0.5%.

This is because, even though the RBA held borrowing costs in November, it’s thought that Australia’s economy will soon need more stimulus, according to News.Com.Au.

In particular, the financial markets predict that Australia’s GDP growth, inflation, salary increases and employment statistics will remain subdued over the next few months.

In part, this is because of the US/China trade war, which was weakened the world’s demand for Australia’s exports. Australia trades closely with both the US and China, yet they’re imposing huge tariffs on each other.

In addition, according to the RBA’s so-called “Liaison Program” of contacts with Australian businesses, companies Down Under look unlikely to pay their workers higher wages in the near future.

This could continue to weigh on Australians’ living standards, in turn discouraging households from splashing out on big new purchases, like a bigger house or new car, and slowing GDP growth.

For example, Gareth Aird, senior economist at CBA says that: “With little progress in achieving full employment expected to be made by early next year, we expect another rate cut in February."

In this case, Australia’s interest rates would stand at 0.5%, what the RBA considers the “lower bound”, before low borrowing costs begin to adversely effect household and business confidence.

As a result, it’s thought that the RBA might even begin its own form of what’s called Quantitative Easing (QE). This is when a central bank injects vast sums into that nation’s economy, to reduce borrowing costs without cutting interest rates below 0.0%.

QE has already been tried in the UK, Eurozone, USA and Japan, yet this would be the first time that the RBA attempts such a scheme.

It looks increasingly likely that the Reserve Bank could soon attempt QE, because this November 26th, RBA Governor Philip Lowe will deliver a speech entitled: "Unconventional Monetary Policy: Some Lessons from Overseas."

This may refer precisely to QE, and Dr. Lowe could use his speech to prepare the financial markets for the RBA to implement unconventional policy, in early 2020.

However, while QE may ease Australia’s borrowing costs without further reducing interest rates, QE historically tends to weaken the currency in question.

After all, it involves printing immense sums of Australian dollars and flooding the financial markets. This greatly increases the quantity of Australian dollars available to households, businesses and banks, thereby reducing its value.

Sterling Vs Australian Dollar Strengthens, as Tories Retain Poll Lead

Furthermore, a third partial explanation why the pound to Australian dollar interbank exchange rate has risen in value today is because, according to the latest opinion polls, the Conservative Party retains a lead.

This is ahead of the UK’s general election, on December 12th. It’s thought that, if one political party wins next month’s election, this will contribute to the UK’s future stability.

According to respected pollster YouGov’s November 16th survey, the Conservatives’ lead has increased by 3% from YouGov’s previous poll, up to 45%. By comparison, the main opposition Labour Party has held steady, at 28%.

So this gives the Tories a 17% lead, traditionally enough for the first-place political party to win a majority of MPs in the House of Commons, to govern effectively.

The financial markets want the UK to have a stable, majority government, because this will provide clarity over the UK’s future economic and political direction, as well as Brexit.

After all, the UK’s extended Brexit deadline is January 31st. So the world’s investors want the next government to approve Brexit at long last, then get on with negotiating the future trade deal with the EU.

To this end, sterling has also been strengthened recently, by news that all the Conservative MP candidates have signed a pledge to support Prime Minister Boris Johnson’s Brexit deal.

Mr. Johnson has announced that all his Tory MP candidates will vote for his Brexit agreement next month, if they win next month’s election. This too could contribute to the UK’s future political stability, according to The Telegraph.

After all, the alternatives include a so-called ‘hung’ Parliament, in which no single political party wins a majority of MPs.

Both former PM Theresa May as well as incumbent Mr. Johnson have lived with this situation in recent months. Here, it’s difficult to pass laws, and opposition MPs can take control of Parliament’s legislative agenda. For the markets, this creates greater uncertainty.

As a result, both the Conservatives’ poll lead and reports of the Tory candidates’ pledge has lifted the sterling versus Australian dollar interbank exchange rate.

According to Jane Foley, at Rabobank, “Both culminate in the same outcome, which is that the withdrawal agreement has a higher chance of going through." In these circumstances, “Brexit is done and sterling goes up.”

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or Contact Us.

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