As the Ashes Battle Gets Underway, the Pound and the Aussie Dollar Are Both Feeling the Pressure

11/07/2013 19:05 BST | Updated 10/09/2013 10:12 BST

The cricketing rivalry between England and Australia is one of history's oldest and fiercest and the crucible of that competition, The Ashes, has just begun again. Sporting contests between the two nations, regardless of sport or code, are always referred to a 'grudge matches'. With each win over the other that little bit sweeter due to the almost tribal nature of the mutual dislike between the two parties.

I'm not sure if it's a good thing or not that the same feeling of enmity is not felt in the currency markets. Maybe that sport is divided into governable periods; 100m, 90 minutes, 5 day tests that is what makes it that much more final. The free, almost languid, flow of the currency markets gives us no final whistle, no extra time within we can summon one last push for victory.

As far as the contest between the two nation's currencies is concerned, the Australian dollar and the pound have both found the going rather tough of late. Sterling's problems have been well documented; it was the worst performing currency in the G10 in the first quarter of this year. However, it is the fall of the pound's Aussie counterpart to 4 year lows which is perhaps worth looking at in more detail.

Aussie dollar was the darling of the downturn until recently. Fuelled by China's continual strong growth, backed up by an economy that never dipped into recession during the credit crunch and an interest rate as high as 7.25% Australia and its currency was a template for a country that had been able to ride out the storm successfully.

The problems arose last year following the realisation that China's economy, the very real sugar daddy, was in difficulty. One of the biggest fears over the past few months for us economic folk has been the limited room for stimulus that the inflation picture in China can afford, given the fact that growth has not quite hit its straps this year. Prices hit a 10 month high this month, following increases in food and fuel costs, and combined with last year's weakest annual growth for 13 years, fears have increased that the authorities would have to settle for low growth and/or high inflation in the coming months.

Settling for lower growth may be ok for China but for an Australian export sector that depends on China so heavily this is a nightmare. Australia's mining boom was naturally starting to wane but the importance of the industry can be overstated; some say that 25% of the increase in Australian GDP since 2006 can be put down to mining on its own. Banking in the UK didn't make up a similar proportion and look at the impact that the credit crunch had on British GDP.

Fold in the political panto of Prime Minister Gillard first calling and then losing a leadership contest between herself and Kevin Rudd, the man whose job she took 3 years ago and you have the makings of a painful period for the currency. The general election in Australia is due in 2 months' time and although the loser of this leadership contest left politics immediately, the other is more than likely to lose the upcoming electoral battle handily as well.

Since the beginning of the year the Aussie dollar is down 4.96% against the pound, 7.5% against its Kiwi counterpart and a massive 12.6% against the US dollar. Assisting this fall has been the Australian central bank, the RBA, which has cut rates by 0.25% this year and consistently spoken about an expensive dollar and the need for further depreciation in the future.

With the on-going weakness in China, the fall in commodity prices that has hurt mining company margins and the likelihood of further rate cuts you'd have to say that the AUD has further room to fall. The game of currency may elude the Aussies much like I hope the quest for the 'Little Urn' will do too.