Eurozone optimism fuels pound to Australian dollar gain while outlook in Australia remains strong, mainly in the mining sector.
Here is my weekly update regarding the pound to Australian dollar exchange rate.
The pound has made strong gains against the AUD in the past week, rising from 1.466 on the 24th Feb to 1.4836 yesterday afternoon (the 1st of March.)
This amounts to a 1.20% gain across the week.
The reason the pound has gained so much is chiefly because of Europe, where sentiment has improved regarding the debt situation.
Greece for instance is getting on with implementing its second bailout, while the European Central Bank continues to flood the financial market with cheap loans. This is in spite of the fact that the outlook in Australia remains strong, especially where mining is concerned.
The European Central Bank took significant steps to improve market sentiment this week, initiating its second Long Term Refinancing Operation. This gives European banks access to 3-year loans of unlimited amounts at just 1.00% and, since the first round in December, has been widely credited with preventing a credit crunch in Europe.
This time demand for the loans exceeded that in December, rising to EUR 529.5bn compared to EUR 523bn. More than 800 European banks borrowed money, and it is hoped this will fuel lending to small and medium businesses on the continent. In the meantime it enables banks to strengthen their balance sheets, and so has done much to calm nerves.
In addition, Greece is getting on with implementing its second bailout at present too.
Though on announcement of the EUR 130bn loan it was widely criticised, as commentators felt it would prevent Greece from returning to growth, sentiment has since calmed. This is in part because the German Bundestag approved the bailout this week, fuelling hopes it might be willing to support Greece further if it needs more funds.
Of course, it is difficult to estimate how long this EU confidence might last. The continent is in recession for instance, meaning investors could quickly flock to alternate locations if the outlook deteriorates.
Furthermore, conditions in Australia remain comparatively superb, making it more attractive.
For instance, mining investment is set to rise $173bn in 2012/3, as the urban classes in China and India continue to improve their living standards. This makes Australia a solid bet compared to Europe, and could fuel AUD strength in the medium term.
I will return with my next exchange rate update next week.