The Australian Dollar has recouped its losses following yesterday’s weak output, as Iron ore prices rally 3.5% as demand for the commodity rises. The Australian Dollar has been one of the better performing currencies of 2016, helped in most part by risk appetite elsewhere in Europe and the US.
But disappointing GDP figures released yesterday demonstrate how an appreciated currency can hurt the Australian economy. A weaker AUD has historically been beneficial to the mining sectors, as well a Australia’s growing service sector. Furthermore, a weaker currency helps attract higher levels of tourism and keeps Australia’s biggest trading partner China happy.
But a surge in the Aussie’s value will raise questions for the RBA, who have decided to keep interest rates on hold at their recent meeting.
The RBA, may decide to hold off on an interest rate cut until the US raise interest rates, which many are speculating will happen next week. The reason being that the US Dollar has less risk sentiment and a US rate hike will push rates closer to that of the commodity currencies such as the Australian and New Zealand Dollar.
Essentially, investment would move out of the risky Aussie Dollar and move into the safe-haven US Dollar.
A weaker Australian Dollar is good for the economy, but in the event a FED rate hike has little impact on the Aussie’s value, the RBA may decide to cut rates to 1% to balance the books.
Is this good for Pound to Australian Dollar exchange rates?
Pound to Australian Dollar exchange rates continue to float around 1.70 for the time being, but a weakening of the Australian Dollar against the US Dollar should never be taken as GBP/AUD strength, especially given the complexities that surround the UK’s departure from the EU next year.
The Pound remains vulnerable to the prospect of a hard Brexit, and with Parliament now in favour of the Tory Government invoking Article 50 in March, sentiment around the Pound could continue to bear negative.
Risk around Brexit may outweigh the risks exposed to the Australian economy, and whilst the Aussie could weaken against a basket of currencies, the Pound may not be one of them.