Aussie At 5-Month High Against the Pound

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Peter Lavelle, 17.01.2013

Down with the pound! The Australian dollar claimed two and a half cents from UK sterling in the last week, rising to 0.6572, its highest point since August 23rd last year. What's to account for this? Well, it's a combination of upbeat global sentiment lifting the Aussie, and fears of a triple-dip recession in the UK dragging down the pound. Looking ahead, if official data released next Friday reveals the UK contracted in the last three months of 2012, we can expect this Aussie strength to extend.

Latest Changes in the Aussie

Here's a look at how the Australian dollar changed value against the three biggest global currencies last week.

Currency PairRate 10.01.2013Rate 17.01.2013 Percentage Change
Pound to Aussie1.55741.5227-2.228%
Euro to Aussie1.26491.257-0.625%
US dollar to Aussie0.96210.9517-1.081%

What Affected the Aussie this Week

Fears a UK triple-dip recession is on the way

The UK really hasn't gotten off to the best start to 2013. While the talk in neighbouring Europe is of economic recovery, Britain looks increasingly set to enter its third recession since the financial crash. This is really because of the country's weak economic fundamentals. Its services sector, for instance, accounting for 76.2% of everything the country produces, flat-lined between October and December. Meanwhile, a looked-for boom in exports has yet to emerge. Given that, fears of the triple dip are dragging down the pound against the Aussie.

Hopes for global growth lift the Aussie

In addition, the Australian dollar benefited from its status as a "risk currency" this week (meaning it gains when the global mood brightens.) This is chiefly because of talk of economic recovery in Europe. Following its disastrous 2012, the Eurozone has gotten off to a fresh start this year, with several senior figures saying the worst of the debt crisis is behind us. Just yesterday for instance, European Central Bank council member Ewald Nowotny told journalists "I am quite sure that the panic situation, if there ever had been one, is over."

What's Going to Happen Next?

If I had to choose, I'm not sure I'd put my money on a rising Australian dollar next week or not. On the one hand, all the things that lifted the Aussie this past fortnight look set to stay in place. The UK will continue to face down a third recession, while the crisis in the Eurozone should go on receding. Yet, acting against that, news out of Australia and China (Australia's biggest trade partner) this week and next could disappoint, taking the wind out of the Aussie's sails, if not sending it down entirely. Let's take a closer look at what's coming up.

Australia's job market could continue to weaken

Australia looks set to become a harder place to find work in 2013, as its mining boom peters out. In December for instance, unemployment rose +0.1% to 5.4%, with the total number of jobs available falling five thousand. This highlights the fact that, mining investment aside, the rest of the Australian economy has really been going sideways since 2008. As that becomes more obvious this year, joblessness could continue to rise, and the Aussie dollar fall, as the sheen comes off Australia's success story.

China set to expand at a more modest pace

Furthermore, the Aussie dollar could also face pressure next week, as economic growth in China, Australia's biggest trade partner, continues to moderate. China is forecast to expand 7.8% in 2012, which, in anybody's book but the Chinese, would be astonishing. Yet, by China's standards, 7.8% is pretty slow, and this would in fact be the country's worst performance since 2004. Given that, even if China hits that 7.8% target, investors might cool to the country's future prospects, affecting both Australia (given its closeness to China) and the value of the Aussie.

What to Look Out For

Here are the biggest economic releases set to affect the Australian dollar in the next week.

Time of ReleaseEconomic Release
Friday 18th 2.00 GMTChina GDP (Q4)
Friday 18th 2.00 GMTChina Industrial Production (December)
Friday 18th 2.00 GMTChina Retail Sales (December)
Friday 18th 9.30 GMTUK Retail Sales (December)
Tuesday 22nd 9.30 GMTUK Public Borrowing (December)
Wednesday 23rd 9.30 GMTUK Unemployment Rate (November)
Thursday 24th 1.45 GMTChina HSBC Manufacturing PMI (January)
Friday 25th 09.30 GMTUK GDP (Q4)

In short then, the Australian dollar has enjoyed a good week, yet the odds of it continuing to gain are finely balanced. Until the next week!

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