It was not too long ago when expatriates left Australia to find employment and return with a $3 Australian dollars for every $1 British Pound Sterling. How things have changed, as of 1st of March 2010 the rate has capitulated with $1.66 Australian dollars for every $1 British Pound Sterling. This long downward trend or devaluation can be attributed to many factors but has been heavily impacted by the following:
Interest Rate differential
Reserve Bank of Australia cash rate at 4%
Bank of England bank rate at .5%
Australia has a commodities led economy and never went literally went through a recession (never actually hit 2 quarters of negative growth)
The UK is a financial services based economy and the global financial crisis heavily hit the sector.
The Australian government net debt even with providing its own stimulus has forecasted it will peak at 10 per cent of GDP in 2013-14.
The UK government this year will issue £225 billion of debt.
Bank Bailouts and Regulation
Australia never had to bail out any of their major banks
The UK had to bailout and nationalize the Royal Bank of Scotland and Lloyds Bank and had permitted the financial system's balance sheet to pass 400 per cent of GDP.
Australian unemployment recently dropped to 5.3%
The UK unemployment rate was steady at 7.8%
Will the pound continue to depreciate?
Consider that during the financial crisis in January 2009 that the pound could have been considered a safe haven. It had appreciated to over $2.50 Australian Dollars to every $1 British Pound Sterling. However since then especially with the massive amount of debt and quantitative easing in UK it has devalued significantly.
While Greece has the problem of being unable to devalue there Euro to pay off there debt, the UK at least have that option although the pound will likely continue to suffer.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
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