Sterling to Australian Dollar Exchange Rate To Rise

As Rudd Resigns?

As government leadership is challenged, the sterling to Australian dollar exchange rate is expected to rise.

Peter Lavelle at foreign exchange specialist Pure FX - 24.02.2012.

It looks to me quite possible that sterling could soon enjoy considerable gains against the Australian dollar. It has already done so to some extent in the past week, as the market realise the debt deal in Greece has done all but nothing to help the Eurozone situation, prompting them to abandon commodity currencies like the AUD and seek safety.

In addition though, there are several factors that could trigger Australian dollar weakness to come, so long as global risk appetite remains poor. These include, among other things, the coming battle for leadership of the Labor Party between former foreign minister Kevin Rudd and incumbent Julia Gillard, and a continuing slowdown in Chinese manufacturing.

Investors Nervous Pending Leadership Contest

One reason the Australian dollar could soon fall is the coming Labor leadership contest between Kevin Rudd and Julia Gillard. (Just check any of the Australian newspapers for the details of his recent resignation as foreign minister plus all the leadership crisis stories.)

This is set to impact the AUD because, like any important political development, it signals a huge change in the direction of Australia and its economy.

For instance, if Mr. Rudd overcomes parliamentary opposition to win the Labor leadership, this would almost certainly trigger a general election in Australia. Liberal leader Tony Abbott could then take power (as looks likely), prompting changes in policy and administration across the Australian government.

This all causes nervousness among investors, encouraging them to leave the Australian dollar to one side until a clearer picture emerges.

Chinese Manufacturing Continues To Decline

In addition, faltering output in Chinese manufacturing also looks set to weaken the Australian dollar. This is because (as I've explained before) Chinese manufacturing fuels demand for Australian commodities such as coal and iron.

In fact, it has almost single-handedly turned Australian mining into a behemoth industry in the past decade.

Hence, as manufacturing output in China declines, so does the outlook for Australian mining, threatening the AUD. (Incidentally, the reason Chinese manufacturing is declining is because of a slowdown in demand for its exports. Its biggest market - Europe - is in recession.)

The interesting thing about this possible AUD downturn is that it ignores the fact that the Australian economy remains in great shape. The unemployment rate in Australia dropped -0.2% last month to 5.3%, putting it among the best-performing economies in the developed world. Job creation too impressed last month, jumping 46,300 against expectations of a 10,900 increase.

Nonetheless, it seems the astonishing rise in the AUD these past months must close.

Planning to move to Australia?

Follow closely what happens with the exchange rate. No further rises for the AUD means sterling to Australian dollar rate will get you more money. So should the other currencies against which the Ozzie dollar raced.

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