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Pound Climbs against Australian Dollar after Central Bank Decisions Weigh on 'Aussie'

May 11, 2015 - Written by Toni Johnson

PBoC Rate Cut Undermines 'Aussie' Demand



After the Antipodean region was rocked by central bank decisions, the ‘Aussie’ softened broadly against other major peers. The Pound climbed against the Australian Dollar as a result of China’s central bank making a downward adjustment to interest rates in a bid to improve economic growth. However, there are some experts in the field that believe the frequent decline in borrowing costs have the potential to cause imbalances in the market to spike further.

Economist Matthew Peter stated: ‘That’s all a function of the interest rate being forced down much lower than it would need to be if there were some other demand-side stimulus to support the economy – and that naturally would come from fiscal policy.’


As China is Australia’s largest trading partner, any developments in the region can impact the ‘Aussie’ exchange rate significantly. However, in some cases, a decrease in borrowing costs from China has allowed the Australian commodity currency to gain. If investors feel the rate cut will boost growth it becomes a positive for the Oceanic nation as demand for exports such as iron ore is likely to increase.

Strategist Sean Callow stated: ‘Rather than rallying on the rate cut, the market took it as more confirmation that China’s economy is not doing well and that previous rate cuts were fizzers so why should this be any different?’


Australian Dollar Falls Short, AUD Declines



Additionally, Australian domestic data failed to help the ‘Aussie’ exchange rate recover any losses. The NAB Business Confidence Index remained flat at 3 in April, while the NAB Business Conditions Index took a downturn, falling from 6 to only 4. Industry experts are suggesting that the Reserve Bank of Australia interest rate cut earlier in the year had yielded few results thus far.

Economist Alan Oster stated: ‘Until confidence lifts significantly it is difficult to see a sustained economic recovery developing. To date, rate cuts have not appeared to do much and it will be interesting to see what, if anything, this week’s Federal Budget will do.’


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Meanwhile, the Pound climbed on Monday despite the Bank of England opting to keep interest rates on hold yet again. The central bank wasn’t expected to make an adjustment to its current 0.50% benchmark, but there’s the possibility now the general election is out of the way, meeting minutes could have a more hawkish edge when discussing the timeframe of borrowing cost increases.
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