GBP/AUD Dynamics and Forecast

GBP/AUD

AUD/USD
Interest rate
The AUD/USD is the fifth most traded currency in the world. During the April 2018 meeting of The
Reserve Bank of Australia, the interest rate was left unchanged at a record low of 1.5%. In United states,
the federal funds rate was raised to 1.5 to 1.75% during their meeting of March 2018. The interest rates
averaged at 4.58% from 1990 to 2018 in Australia and 5.7% from 1971until 2018 in United States.
According to Investopedia, higher interest rates increase the value of a country's currency. This is due to
a higher number of foreign investments because of the higher interest rates, increasing the demand and
value for the home country's currency. Equally, lower interest rates are inclined to be unappealing for
foreign investments hence decreasing the currency’s value.The reasons for the depreciation in AUD
against USD is the result of weak commodity prices as they are undoubtedly a negative for exports.A
country's balance of trade between imports and exports can be a vital aspect in influencing the
exchange rate. That is due to a greater demand for a country's products results in a greater demand for
the country's currency as well. This in turn will increase demand for the currency of that country, as
foreign investors look to obtain local currency in order to purchase local assets. This leads to a stronger
exchange rate according to The Commonwealth Bank.
Government Intervention
In addition to the above influences, official (government or central bank) intervention into foreign
exchange markets can employ a significant influence on the value of that country’s currency. In
Australia, official intervention is through the Reserve Bank, buying and selling the AUD in trade with

banks and a select number of non-bank authorised FX dealers. The RBA uses the cash rate to maintain
price stability in Australia as well as managing growth of the economy as changes in the cash rate affect
the likelihood of individuals attaining funds as higher interest rates make it more expensive to borrow
money which leads to a lower demand for goods and services.

Due to the Australian Dollar being smaller in comparison to the US Dollar at present, a percentage of the
demand for goods and services from the United Sates would switch to the relatively cheaper Australian
items. This means that there would be an increased demand for Australian products which in turn will
increase the demand for the AUD, shown as a new demand curve.
Exchange rate expectation
The AUD/USD is currently at 0.77. Analysing the exchange rate forecast by National Australia Bank
(NAB), it can be seen that AUD/USD is expected to appreciate up to 0.78 in the month of June 2018.
From June onwards, the AUD/USD is anticipated to gradually start depreciating back to 0.77 in
September 2018 and 0.75 in December 2018.
However, The Commonwealth Bank anticipates that the Australian Dollar will rise up to 0.83 against the
US dollar before the year ends which is an 8% increase from the current exchange rate. The
Commonwealth Bank forecasts 7 % increase and 8% decrease in GBP/AUD. In the article, Elias Haddad
states that “Yield curve differentials already point to stronger Australian economic growth prospects
relative to the US."