Pound to Australian Dollar Drops

in spite of Ongoing Global Concerns

The pound to Australian dollar exchange rate fell, but reduced interest rates may cut investment in Australia, which could boost the pound back.



Peter Lavelle for Pure FX - 26.08.2011.

Sterling has dropped against the Australian dollar in the past week, in spite of ongoing global economic concerns that until now have bolstered the pound against its antipodian rival.

Euro

In Europe for instance, peripheral debt concerns continue to trouble the markets. Over the weekend it emerged that Finland had agreed a bi-lateral agreement with debt-laden Greece on its bailout contributions, so that Greece must provide collateral to secure Finnish aid.

To little surprise this has angered other Eurozone members, both because Greece must use funds from other contributors to fund the agreement and because it is bi-lateral. Hence should a solution not emerge the entire bailout could be scuppered.

Sterling

In Britain meanwhile the latest public sector net borrowing data proved encouraging, entering surplus last month to -£1.961bn compared to predictions of +0.2bn. This is positive in that it suggests government debt reduction plans are on course.

Of course Britain is not immune to the global slowdown however, and this is reflected in fiscal policies. For instance the latest minutes from the Bank of England reveal that the entire MPC opted against raising interest rates last month, deciding 9-0 to hold rates at 0.50. This reflects a desire to protect British growth amidst uncertain global economic prospects.

Australia

Turning to Australia last but not least, concerns that the mining boom is having a negative impact on other economic sectors have come to the fore of late.

In the past week the Reserve Bank of Australia commented stating that the mining boom had made things worse than expected, driving inflation and boosting the Australia dollar but not fuelling growth. This means that industries dependent on exports - manufacturing for instance - have come under intense pressure as costs rise.

For instance last week the biggest steel manufacturer in Australia - Bluescope Steel Ltd - announced it was cutting 1000 jobs and closing the unprofitable export aspect of its business.

Moreover so large is the gap between mining and other economic sectors, Westpac group predict that unemployment in Australia could jump to 5.5 from 5.1 in 2012 as industries beside mining cut jobs to reduce costs.

In addition in order to combat rising inflation the RBA could be forced to cut interest rates and according to Westpac is expected to reduce them 1.0 to 3.75 in the coming 12 months. From a foreign exchange perspective this could boost the pound to Australian dollar exchange rate, as reduced interest rates cut investment in Australia.





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