More than 30% of Australian exports head directly to China, the world’s second largest economy, making China, Australia’s largest trading partner. Thus, it’s no surprise to see the trade tensions between the US and China have caused the Australian economy to slow. However, it is hoped that recent interest rate cuts by the Reserve Bank of Australia, along with tax cuts, will be enough to revive growth.
|Currency Pair||% Change (Month)||Difference on £200,000|
Recent back-to-back rate cuts have lowered the Aussie interest rate to an all-time low of 1%. The average base rate since 1990 has been 4.39% and the back-to-back rate cut was the first since 2012. Through the 12 months to the end of Q1, the Australian economy grew at 1.8% but during this period house prices declined, and wage growth was minimal.
However, the outlook for the Aussie economy remains reasonable despite the global economic slowdown although investors who have previously benefitted from a high interest return may now be looking elsewhere with one of those places being the US dollar. Historically, the high Aussie interest rate has always provided a risky but good yield but with Aussie interest rates now lower than that of the US, investors could be looking at diversifying their portfolios and moving into currencies such as the US dollar, which is now viewed as a high yielding and safe haven currency. Japanese investors, typically large buyers of Aussie bonds have also exited the currency over the past few months as the Aussie dollar no longer qualifies as a high yield, adding further pressure to the antipodean currency.
As a commodity-based currency and historically exposed to the carry trading strategy (borrowing at a low interest rate and investing in an asset that provides a higher rate of return), the Aussie dollar can be volatile. Over the past 3 months GBP/AUD interbank rate has fluctuated in a range of 5%.
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