Pound To Australian Dollar Exchange Rate Spirals As RBA Cuts Interest Rates

Modified: Tuesday, 2 October 2012 08:41 BST - Written by Minesh Chaudhari

STORY LINK Pound To Australian Dollar Exchange Rate Spirals As RBA Cuts Interest Rates

Market focus during last night’s Asian session settled on the Reserve Bank of Australia’s policy decision. The RBA sprung a surprise on market participants by trimming its key lending rate from 3.5% down to 3.25% - analysts had been anticipating a vote for ‘no change’ by the Australian central bank’s policy committee. The RBA’s decision confirms that Australia is still firmly in the midst of a rate-cutting cycle, (domestic rates have now been downed by 1.5% in the past year). The statement which accompanied the announcement revealed that the RBA’s policy committee had become increasingly concerned about the effect that the recent plunge in commodity prices was set to have on Australia’s export-driven economy. A softening of demand from Australia’s key export partner, China, was also sited as a reason behind the rate cut.

Perhaps more worryingly for institutional investors holding Aussie-denominated assets, the RBA Governor Glen Stevens also observed that the historically strong Australian Dollar was causing difficult trading conditions for the country’s exporters by pricing their goods and services out of export markets. Ordinarily, if a central bank wants to actively weaken its nation’s currency, then it will succeed in its aim. The overnight announcement has seen the GBP AUD exchange rate trade close to 1.5700 early today, tipping the scales at 1.5692 a short while ago.

Elsewhere, this morning’s highlight, in terms of scheduled data releases, comes in the form of the latest edition of the whole-of-eurozone Producer Price Index survey. This key figure is considered to be a key leading indicator of inflation, so it will be closely-watched by analysts looking for clues on the near-term direction of the ECB’s monetary policy. An annualised reading above the expected 2.6% would limit the European Central Bank’s ability to raise interest rates in the foreseeable future, providing a much-needed fillip for the euro.

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