Australian Dollar Drops in Knee Jerk Reaction to Disappointing Australian Housing Permits

TransferWise content team
03.07.17
4 minute read

Demand for the pound was considerably strong versus the Australian dollar through last week. A lack of driving data for the Aussie dollar, in addition to the Bank of England (BoE) hinting towards a rate rise, pushed the GBP-AUD to A$1.6950.

What do these figures mean?

When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written: 1 GBP = 1.72119 AUD

Here, £1 is equivalent to approximately A$1.72. This specifically measures the pound’s worth against the Australian dollar. If the Aussie dollar amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 AUD = 0.57677 GBP

In this example, A$1 is equivalent to approximately £0.58. This measures the Australian dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the Aussie dollar.

The pound received a significant boost as a BoE focus on inflation, in addition to high household debt, encouraged investor belief that an interest rate hike may be a reality before the end of the year.

Looking ahead, today sees the release of the first of three PMI’s in the UK. PMI’s are a measurement of business conditions in three sectors - manufacturing, construction and service. The manufacturing PMI is released on Monday. As with all PMI’s, a figure over 50 represents expansion, whilst a figure below 50 is contraction.

Today’s manufacturing PMI will be of particular interest because it will give an insight into business sentiment immediately following the disastrous general election in June. A figure lower than the expected 56.7 could cause the pound to sell off once more against the Australian dollar.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Australian dollar data points pick up

After several quiet weeks of data for the Australian dollar, the economic calendar is fuller this week. The new week kicked off with the market digesting inflation data and housing permits, which were driving direction in early trading.

Whilst inflation figures for Australia were slightly better than expected month on month, the year on year data showed a tick down in inflation to 2.3%, despite expectations of 2.8%. However, the big surprise has been the huge drop in the number of building permits. A decline of 2% had been pencilled in by analysts, when in actual fact the number of permits for new construction projects fell by 5.6%. This figure implies a huge drop in corporate investment and a knee-jerk reaction saw the pound charged above the Aussie dollar.

Next up for Australian traders will be the Chinese manufacturing PMI. Chinese data can have a large impact on the Australian dollar, so a better than expected figure from China could boost the Aussie dollar and pull the GBP-AUD exchange rate lower.

What’s the link between China and the Australian dollar?
China is Australia’s principal trading partner and the world’s largest consumer of metals. Commodities, particularly iron ore, make up the bulk of Australian exports. Australian iron ore needs to be purchased using Australian dollars. So, if the demand or expected demand for the iron ore decreases because China’s economy looks like it may be slow, the price of the metal normally lowers in response. Thus, the demand for Australian dollars will also go down, devaluing the currency.
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