The first two and a half months of 2011 saw the Australian Dollar weaken against the pound from A$ 1.51 to nearly A$ 1.65 and then within the last 6 working days the Pound gave up 75% of those gains. The retracement has causes on both sides of the equation.
From the UK perspective, a week of poor data, growth forecast downgrades and falling economic activity were enough to batter the Pound. As far as the Australian Dollar is concerned, there appears to be a shift in sentiment going on.
Where the Aussie Dollar used to be the currency that investors would buy when they felt confident and sell when that confidence faded; we now see very positive sentiment towards the resilience of the Australian economy and the likelihood of higher interest rates also adds a certain je ne sais quoi.
The Australian and New Zealand Dollars are both exceptionally strong at the moment. Whilst their underlying economies are in pretty good shape, the Queensland flood and cyclone and the Christchurch earthquake would, you might have thought, have weakened the currencies.
However, it seems the strength we have witnessed over the last month or so is in part due to the immense inflows of insurance funds settling claims. Something like A$ 2.2 billion and NZ$ 1.7 billion is known to be due into Australasia over the next few months and insurance companies or their bankers around the world will have to buy all of those Aussie and Kiwi Dollars in order to settle the claims.
However, insurance payouts are clearly one-off events so the effects could have a limited shelf live. That’s worth knowing if you are trying to sell either Aussie or Kiwi Dollars at attractive levels.
As you can see from the chart above (click thumbnail for bigger image) , there are a couple of support lines below the Sterling – Australian Dollar exchange rate and those with Aussie Dollars to buy will be hopeful that these will hold and propel this pair back up to better levels.
Sadly, that may not be the case because UK data for this week is not looking positive and China’s stated aims to slow its economy appear to have barely caused a ripple on the surface of Aussie exports. Please do not assume the Pound will recover because there is every chance it will not.
Thanks to the folks over at halo financial who helped contribute towards this article