This morning, investors learned that the Westpac-Melbourne Institute (WMI) survey of Australian consumer sentiment fell last month by 1.8% and remained in “pessimist” territory for the seventh consecutive month. The survey is seen by many analysts as an important gauge of the Australian public’s willingness to spend, which is itself an important driver of the domestic Australian economy.
In spite of the gloom painted by the WMI survey, the Australian dollar never wavered this morning, and as of writing at 05:25 GMT, it remains in the mid-75s versus the US dollar, still above yesterday’s close of 0.7536.
Further news of interest for those watching the Aussie closely came this morning from Bloomberg, who interviewed Chris Siniakovis this week.
Siniakovis, who is head of Australian fixed income at Frank Templeton Investments, told Bloomberg journalists that in his opinion, Australia’s central bank, the Reserve Bank of Australia (RBA), may cut interest rates in early 2018 – a move he thinks will be forced by a deterioration in the labour market.
Siniakovis also believes that consumer spending will be hindered by high levels of household debt and low wage growth – the latter being a persistent problem for Australia and something of a headache for decision makers at the RBA.
Earlier in June on BestExchangeRates.com we reported on moves by traders to place bets on an RBA cut following a recent deterioration in the country’s economic outlook. Australia’s national income has been hit by a tumble in iron ore prices (iron ore being the country’s largest export) and analysts are equally concerned by patchy economic data. While for much of the world, the end of loose monetary policy is nearing, Australia joins Switzerland as one of only two advanced economies for which a rate cut is considered a possibility in 2017. Pricing in derivatives markets does, however, suggest that the probability of a cut remains low, at around 20%.
UK Inflation Soars to Four-Year High
In other news, the UK’s Office for National Statistics (ONS) said yesterday that UK inflation climbed to 2.9% in May, close to a four-year high and exceeding market expectations for a print of 2.7%.
A rapid rise in UK inflation is the result of a devalued British pound, which was hammered following the UK’s vote to leave the European Union in June of last year.
Since the historic ‘Brexit’ vote, inflation in the UK has risen sharply from its pre-referendum level of 0.5% and has now risen in seven of the past nine months as the cost of imported goods rises for British consumers and businesses due to them holding a weaker currency.
The ONS said yesterday that the main drivers of inflation in May were goods and services of a “recreational and cultural” nature, which include games, toys and package holidays.
Yesterday’s data increases the likelihood that the UK’s central bank, the Bank of England, will hike rates in 2017. Consequently, sterling exchange rates rallied in the hours that followed yesterday’s release.
Against the US dollar, the pound rallied to 1.2752, and in doing so it clawed back more than a third of its losses since investors learned late last week that voting in the UK general election had produced a hung parliament.
Against the Australian dollar, the pound fell to an eight-week low yesterday of 1.6728 but recovered following the inflation data and ended the day at 1.6915.
Against the New Zealand dollar – one of the strongest currencies in recent weeks – the pound fell yesterday to a three-month low at 1.7496, but recovered to 1.7656.
Having fallen as low as 138.67 on Monday against the Japanese yen, the pound managed to climb back through 140 yesterday and ended the day at 140.33.
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Author: Joel Wright
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