GBP - Australian Dollar update

Home » Foreign Currency News » GBP - Australian Dollar update

The natural disaster in Japan has sent the world's financial markets into turmoil. In the first few hours of Monday morning trading, the Japanese stock market lost 6% of its value as investors hastily search for so called "safe haven" assets.

Predictably, this meant traders selling Australian Dollar assets and reverting instead to the relative safety of larger currencies like the US Dollar, and ironically, the Japanese Yen.

In times of crisis investors tend to repatriate their assets, but in this case the repatriation flows are exacerbated by investors who took advantage of the “carry trade”. The carry trade involves investors borrowing one currency at a low interest i.e. the Japanese Yen and purchasing a currency with an high interest rate i.e. the Australian Dollar and benefitting from the higher yield.

The Japanese Yen has therefore strengthened and the Australian Dollar weakened as investors sell carry trade positions and buy back into the Japanese Yen. Previous bouts of weakness for the Aussie Dollar have tended to be short but severe, so we could see continued weakness over the next few days if the situation surrounding Japan's nuclear facilities does not improve.

The Bank of England held interest rates at a record low of 0.5% last week as expected. Even though the market didn’t really expect the Bank of England to raise interest rates, it still produced a mildly negative reaction for Sterling as some investors were hoping for a surprise hike. When it didn't come they sold Sterling. The market is now waiting for the MPC minutes, due out next Wednesday morning, to see how the nine MPC members voted. There is also the small matter of the 2011 UK budget on the same day.

Sterling is at the top of its recent range, hitting a 5-month high yesterday at £/AUD 1.63, but has tended to retreat from these levels once it is there over the last few months. Events in Japan however, weakness in high yielding currencies could see Sterling break higher out of its range.

If you are buying the Australian Dollar it would be prudent to consider purchasing some Dollars now to benefit from this recent movement in the hope they can buy more Dollars at higher rates if the current spike continues.