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John from Moneycorp

Australian dollar update 04/10/2011

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Global economic sentiment drives the Aussie dollar, just as it does everything else in financial markets. When the outlook is positive, the (potential) increase in demand for Australia's coal and minerals takes the currency higher. And vice versa. There was a bit of both last week, but mostly it was an extension of the AUD's retreat that cost it 6% of its sterling value in September. Nervousness about a bankrupt Greece – and about what that might mean for the world economy – has dampened demand for the Australian dollar.

Nor has the dollar received much help from the Australian ecostats. New home sales showed a 1.1% improvement in August but, after a cumulative fall of -16.2% in the preceding three months, it wasn’t much consolation. More worrying was a further one-point decline in the AiG performance of manufacturing index to 42.3. Anything below 50 means falling activity – and 42.3 is a worryingly low number, that increases the likelihood of an interest rate cut before the year is out.

From the UK perspective, it is worth bearing in mind the possibility of quantitative easing (QE) – if the Bank of England release further QE in the near future, this is likely to have an adverse effect on sterling against all major currencies. Thursday’s monetary policy committee meeting will confirm if (or when) QE is occurring.

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Further to the post above, The Bank of England today said it will inject a further £75bn into the UK economy through quantitative easing (QE). The Bank has already pumped £200bn into the economy by buying assets such as government bonds in an attempt to boost lending by commercial banks.

 

The last time QE took place was in 2009 – recently there have been calls for further QE to aid the fragile recovery as global growth has slackened - therefore this threatens the UK economy (e.g. exports).

 

Thanks

 

John

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Looking ahead to this week, UK unemployment figures will be released on Wednesday.

Depending on the figures released, this could have an impact on the strength of sterling. Economists are predicting that unemployment (in Britain) is set to rise to its highest level for 17 years.

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Further to the post above, unemployment figures have reached a 17-year high.

In the three months to August, the total rose by 114,000 to 2.57 million. It gives the UK a jobless rate of 8.1% (the highest since 1996).

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The Aussie dollar has strengthened after the release of better than expected Australian employment figures.

Figures showed that 20,400 jobs were added to the Australian economy in September – this was double the 10,000 rise many expected.

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The Australian dollar has strengthened due to optimism that world finance leaders were close to announcing a comprehensive plan to tackle Europe's sovereign debt crisis (if a plan is agreed then this provides more stability therefore riskier assets such as the Aussie dollar benefit from this type of news).

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