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2016

Sterling – Australian Quarterly Forecast April – June 2016

Published: Friday 01 April 2016

  • Brexit vote on the horizon
  • UK Data has been fairly mixed
  • AUD forecast

Introduction

The Sterling – Australian Dollar exchange rate is one of the most volatile in the financial markets. No economy is immune to external factors and the Aussie economy is not alone in that. Australia’s trade with China and the US make the AUD susceptible to the positive and negative economic news from those countries as well as the ups and downs of the domestic Aussie economy.
 
The UK market is also facing pressure from the possibility of a Brexit (UK leaving the EU) and this is having a dramatic effect on the Pound.
 
Here, we will cover some of the possible outcomes in this exchange rate, the external factors that will influence this currency pair and, of course, the UK economy and how that will directly impact the Sterling–Aussie Dollar exchange rate.


 
 
 

Brexit vote on the horizon

 
As soon as David Cameron announced that he had completed his negotiations and was ready to ask the UK public for their decision on Britain's membership of the EU, the Pound fell in value. It then slumped again when Boris Johnson announced he would be pressing for an exit; the added weight of The London Mayor's endorsement being seen as vital to the strength of the 'leave' campaign.
 
However, the drop in support for the Pound was not an unbridled endorsement for continued EU membership. Currency markets hate uncertainty like nature hates a vacuum and few things are more uncertain than a country deciding whether it wants to change a political situation that has developed over 40 years. Undoubtedly, if Britain votes to leave the EU, there will be a whole heap of renegotiation, restructuring and clarification required by the UK government and by the EU. 
 
There are many factors that will impact on the Pound’s strength over the coming months. Due to its economic strength, most EU member states would like to see the UK remain a member but this sizeable financial contribution is at the heart of the EU membership debate and yet little is being said about how that money would be spent if it was not being sent to Brussels each year. If there were more certainty over this aspect of a potential Brexit, the markets may look more favourably on the Pound. Good news for investors.
 


 

But do the UK chancellor and the Bank of England really want that?

 
A weak Pound generally fuels inflation because it raises the cost of imports and that would normally be a reason for the Bank of England and Treasury to try to maintain a strong-ish Pound. However, the weakness in energy and commodity markets and the paucity of demand across the globe means there is virtually no global inflation at the moment. So the major benefit of a weaker Pound, i.e. cheaper prices for British goods overseas, is a very attractive bonus for the UK. The UK economy is already in relatively good form and has weathered the recovery from the mid-noughties financial crash with rather more aplomb than most. So the added assistance of an export advantage is very welcome. Hence the BOE is not panicking at the sight of a 10 per cent fall in Sterling's value. The scene is set for a lot more speculation and a great deal more spin in the debate over Britain's relationship with the EU – let’s face it, no one is currently sure what a leave vote would really mean for the UK’s relationship with other EU countries.
  

 UK Data has been fairly mixed

 
Currently, data has been fairly mixed of late with unemployment still falling. The forward looking PMI's still above the 50 level that is the dividing line between contraction, expansion and growth estimates being revised higher. The budget deficit continues to rise however and credit is becoming harder to obtain. The market focus though is clearly on the upcoming referendum and the Pound is being whipped around by rhetoric and opinion polls that are within the margin of error. For now, the market is trading on the uncertainty and the Pound is unlikely to make gains until we know what the landscape will look like after June 23rd.
 
 
 
 
 

GBP-AUD Forecast

 
The uptrend in GBPAUD gave way in February and there was always the risk that if it did, it would be followed by a sizeable fall which is where it found itself through March. The Pound is struggling against all currencies other than the USD (which has weakened on dovish US monetary policy) and, looking at the GBPAUD chart it is heading down towards AUD1.8400 which is a 50% retracement of the whole rally from the 2013 low (1.44) to the 2015 high (2.24). With the EU referendum vote still 2 1/2 months away (June 23rd) and the polls still indicating a chance of the UK leaving the EU, in this environment it’s not unreasonable to expect the Pound to remain under pressure.
 
Moreover, the shift of US monetary policy is boosting demand for the Australian Dollar. In December the US Federal Reserve forecast 4 interest rate increases over the coming year, which dampened risk appetite and commodity prices as well as higher yielding currencies like the Aussie and Kiwi Dollars. March arrived and Fed Chairman Yellen suggested that interest rates may only increase twice this year – the shift in policy triggered by concerns over slowing global growth, falling US domestic output and low inflation. Risk appetite has increased and the Aussie is gaining whilst the Pound struggles with the EU Referendum vote looming on the horizon.

Last week Reserve Bank of Australia Governor, Glenn Stevens said that the Australian economy was adjusting quite well to lower commodity prices and that the central bank had more scope to respond should circumstances warrant. The outlook for monetary policy in Australia is relatively neutral for the remainder of the year which is helping bolster demand for the Aussie Dollar after a series of interest rate cuts over the last 18 months. The RBA interest rate meeting on 5th April confirmed the central bank is in a “wait and see” holding pattern and that took some of the pressure off the Australian Dollar.  The RBA sees the Australian Dollar as being over-valued and would love to see further weakness in their currency. I am sure anyone planning to move to or import from Australia would tend to agree.
 
So the short term target on GBPAUD is 1.84 – the fact is the 50% retracement may provide some support so stop loss orders below there may be wise. Whilst GBPAUD is oversold on the daily chart, it’s not on the longer term weekly and monthly charts – consequently we would suggest there’s more downside to come. With the outcome of the EU Referendum so uncertain, it’s fair to say the Pound will be subject to further weakness against all currencies until the vote (and thereafter if we vote to leave the EU). We would advise you to consider trading a portion of your funds here if you were buying Aussie Dollars. We would advise sellers to trade a portion of their funds with more held aside in case it breaks below 1.84 and for a downside target, 1.7250-1.7500 is best advised.
 

 

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Quaterly forecast by David Johnson

 




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