Australian dollar starts to strengthen slightly against the pound and euro. Where next for AUD rates?

AUD GBP Lower After Dismal Employment Report

As expected the RBA kept the Australian Interest rate on hold overnight. There was an outside chance of a rate cut so the lack of any cut has helped the Aussie slightly. We have also seen the Aussie benefit from some slightly better Chinese data which has given a small spike for anyone selling Australian dollars. Importantly the RBA was not so firm about further cuts, this may change the current outlook on the Aussie.

The RBA did not state overnight much more of a commitment to cut rates further although the tone seems to suggest they are in still in an accommodative phase. I think on balance the Aussie will remain weak against the pound and the euro which means whilst there may not be major losses it is unlikely to appreciate dramatically and holding out for the kind of levels we had a few months ago could prove a bad idea.

As I have been posting for many weeks I expect the Aussie to remain very much on the backfoot in the coming months. As tough a pill to swallow as it may be, anyone selling Australian dollars to buy Euros or sterling will struggle to get significantly better rates. We will without doubt see improvements (read below) on the rate but if you are hoping to get back to say 1.50 (0.6667) selling Aussies for GBP or 1.30 (0.7692) selling for Euro, there are some reasons to consider rates may not get there.

Interest Rates Interest rates are one of the key determinants of a currency’s strength. Essentially the higher an interest rate the more investment that currency attracts and the stronger it is. The Australian Interest rate has been cut from 4.75% in July 2011 to 2.5% at present. Whilst the strength and weakness of the currency does not directly correlate to the interest rate (the AUD’s strongest period against sterling was earlier this year when the interest rate was 3%) it is a major factor in explaining the economic policy moving forward. In the current climate of further rates cuts Investors are weary of holding Aussies that are more than likely to weaken in the future than strengthen.

Despite the debt problems still plaguing the Western economies the improvements in growth seen in the UK and the eurozone are helping the pound and euro to remain very well supported. Better economic news in both economies is also helping both currencies to gain against the Aussie further compounding the losses for AUD  sellers.

When to sell AUD in September? – I would highlight the elections this weekend as an important event which could cause the Aussie to strengthen. If there is a rate cut in October or November, this may prove to have been the opportunity to sell Aussies. Don’t forget even if you do not need the funds just yet we can book rates forward for a small deposit of the total.

If you are weighing up a transaction on GBPAUD or EURAUD (or any other currency) we can help with better rates than the banks and all the information to make an informed decision on when to enter the market. For a free, no obligation discussion on how it all works please email me Jonathan on [email protected], I look forward to hearing from you.