In 2007 one GBP would buy you over 2.50 AUD’s. Since then, with the exception of a surge in 2008 the GBP has been steadily falling against the AUD to the point where it is now $1.47. This movement is a devaluation of 41% in less than 5 years. Why did this occur and is this trend likely to continue?

A number of theories have been put forward as to why currency trends occur. The main theory is the interest rate-differential argument. In essence this theory argues that the market has reacted to the interest rate differential between the key bank rate in the UK and the key cash rate in Australia. In the UK the current BoE key bank rate is 0.5% while in Australia the latest RBA cash rate is 4.25%. At the retail level savers can easily earn 5.0% in Australia but struggle to find 2.5% in the UK. But is it reasonable to attribute a movement of 41% to just a rate differential?

Both countries have retained their AAA credit ratings, so we cannot attribute the fall in GBP to a ratings changes. Something more fundamental must be going on.

For me the answer is quite simple. “It’s the economies stupid!” The Australian economy has been one of the few economies to have been a mass beneficiary of the gargantuan growth of the Chinese economy. While this resources boom continues, prospects for the Australian economy will stay strong, as will its currency. On the other hand there are few if any large reasons to be positive about the UK economy.

While the Australian economy is umbilically linked to the Chinese economy the UK economy is heavily exposed to the waning fortunes of the Euro zone.

When it comes to their economies the Aussie looks relatively protected, whereas no one is saying that there is any chance of improving outlook for the UK economy. The only consensus about the UK seems to be that times are tough and are likely to get tougher.

Not only is the Australian economy in relatively robust health, its public finances are also stronger. IMF figures show that Australian public debt is 20.5% of GDP while the UK’s public debt is 75.5% of GDP. Looking forward the Australian government has plans to bring public finances into surplus…

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