Sterling strengthened against the Australian dollar on the interbank market this week, at one point hitting its highest in 41 months, or since the UK’s Brexit referendum in late June 2016.
Partly, this is because the financial markets are increasingly confident that the Conservative Party will win a majority at next month’s UK election, following YouGov’s MRP poll.
However, looking Down Under, the Australian dollar has weakened, because investors think that the Reserve Bank of Australia (RBA) will further cut interest rates in 2020, and start its own version of quantitative easing (QE), an extraordinary monetary stimulus. This is even though RBA Governor Philip Lowe insisted this week that the central bank won’t cut interest rates below 0.0%, nor initiate QE.
To explain, this week RBA Governor Lowe said that Australia’s central bank won’t cut interest rates below 0.0%, from their current 0.75%. In addition, Mr. Lowe added that the RBA won’t begin its own version of QE, until Australia’s interest rates are at their effective lower limit. Mr. Lowe’s intention was to shore up Australian businesses’ and consumers’ confidence, as they’ve been made nervous by Australia’s repeated interest rates cuts so far this year.
However, the financial markets took Mr. Lowe’s comments to mean that, although the RBA won’t cut to 0.0%, it may reduce borrowing costs to 0.25%, and it’s here when the Australia’s central bank could begin QE. This would involve greatly increasing the supply of Australian dollars available, to cut the cost of a loan, but simultaneously devalue the currency. So this has weakened the Australian dollar.
Turning to next week, the Reserve Bank will announce its December interest rate decision on Tuesday 3rd at 03.30 GMT. Here, we’ll learn if the RBA further intends to ease borrowing costs or begin QE, sometime in 2020, which may influence the value of the Australian dollar.
Also, on Wednesday 4th at 00.30 GMT, Australia’s economic growth figures for Q3, from July to September, will be released. These are forecast at 0.5%, and a figure above or below this may impact the AUD.
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