The AUD to GBP exchange rate was 0.12% higher on Friday after giving up gains on Thursday at 0.5650. AUDGBP is trading at the 0.5625 level as traders pause ahead of the UK budget. The market is also watching tension in the bond markets and is wary of making big bets into the weekend.
Aussie yields warn of bond market trouble
It’s only a few weeks since the Reserve Bank of Australia doubled its QE program to A$200 billion, where the bank said it will increase interest rates in 2024. Central banks have the idea that the market will stay stuck at zero interest rates until they want to pull the lever.
The RBA is now increasing its bond purchases as yields start to creep up in other nations. The RBA purchased $3BN in three-year government bonds on Thursday, which is the most since the bond market turbulence of March 2020.
ANZ economist David Plank said the RBA had been “unsuccessful” in keeping bond yields suppressed, saying, “There is upward pressure on market interest rates and that will flow through into quite a bit more expensive borrowing rates for states and corporates for 10-year money compared to the start of the year”.
The purpose of zero percent interest rates is to keep government budgets under control but there is growing risk that the market could squeeze the central banks and force further stimulus.
Commodities sell-off weighs on Aussie
Commodity prices sold off on Thursday after their recent strong gains had boosted the Aussie dollar. Gold fell from $1,800 to $1,765 and the precious metal is now threatening the $1,750 level.
With yields rising, safe havens such as gold as less attractive and this drags on the miners, which have been a key factor in the ASX stock market’s recent all-time highs.
In the pound sterling, traders are taking profits ahead of the latest budget on March 3rd and some investors are getting cold feet that the Chancellor may not have the freedom to stimulate the economy as much as had been hoped.
Yesterday saw ex-Chancellor Philip Hammond telling the Chancellor to hold off on “extravagant” spending and fiscal promises. Hammond has also urged Rishi Sunak to reverse previous manifesto plans to help balance the books.
Prime Minister Boris Johnson has released a cautious roadmap for the reopening of the economy and business groups in many sectors are now calling for additional support to help the recovery in the yea ahead. The car sector was the latest to ask for assistance, with the Society of Motor Manufacturers and Traders (SMMT) seeking an extension to the furlough scheme, alongside support for training and manufacturing investment.
The AUDGBP is hovering above the 0.5600 level and the pair may consolidate into the budget. The US market open could see volatility if there is further activity in the US bond yields.
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