The pound to Australian dollar interbank exchange rate hit a 41-month high this week, its strongest since the day after the UK’s Brexit referendum, on June 24th 2016.
Partly, this is because markets increasingly think that the Conservatives will win next Thursday’s UK general election, which may contribute to quickly resolving Brexit.
That said though, the Australian dollar has fallen in value this week, because Australia’s economy has consistently disappointed.
To begin with, Australia’s GDP expanded by just 0.4% in Q3, from July to September, said the Australian Bureau of Statistics (ABS) this week. This was below economists’ forecasts for 0.5% growth, as well as Q2’s expansion of 0.6%, from April to June.
Elsewhere meanwhile, Australia’s building permits fell by minus 8.1% in October, far below predictions for a minus 4.0% figure, while retail sales Down Under were flat too. So all in all, this points to slowing economic momentum in the antipodean economy, thereby weakening the Australian dollar.
This week, the Reserve Bank of Australia (RBA) held interest rates at 0.75%, their all-time low, as widely forecast. In particular, RBA Governor Philip Lowe and his team wants to give the central bank’s three previous interest rate cuts this year time to “filter through” to the economy.
However, what with Australia’s economic data this week arriving below forecasts, it looks increasingly likely that the RBA may reduce interest rates to new lows next year. This would make taking out a loan Down Under cheaper, yet simultaneously tends to weaken the value of the Australian dollar.
Next week, RBA Governor Lowe is due to give a speech, on Monday 9th. Here, we may learn if the Reserve Bank looks likelier to cut interest rates further in 2020, in light of this week’s downbeat performance.
Also, we could find out if the RBA intends to launch its own version of what’s called Quantitative Easing (QE), an extraordinary monetary stimulus tried elsewhere in the developed world.
QE involves printing vast sums of money, to try and reduce a country’s borrowing costs. Yet because it increases the money supply, it traditionally weakens the currency in question. So if Mr. Lowe talks about QE next week, it could influence the Australian dollar.
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