• Brexit trigger due to be fired
• UK data continues to impress
• AUD stays strong as commodities recover
There is so much uncertainty in the world right now that the only certainty is volatility….isn’t it? Oddly, when it comes to the Sterling – Australian Dollar exchange rate, that hasn’t proven to be the case. Surprisingly robust UK data and uncertainty over the strength of the Australian domestic economy have corralled this exchange rate into a narrow range for the past two months.
Surprisingly positive economies in the UK and Australia are causing confusion over which way traders and investors should turn. At an annualised 1.8%, the Australian economy is growing fast enough to quash any idea of further interest rate cuts and with inflation at 1.3%, there is little pressure on the Reserve Bank of Australia (RBA) to raise interest rates from the current 1.5% base. Equally, the stubbornly positive UK economy is embarrassing the naysayers who predicted a post-Brexit-vote meltdown.
Here, we will cover some of the possible outcomes for this exchange rate, the domestic and external factors that may influence those movements and other factors that will move this rate.
Brexit – On your marks….get set…..
UK Prime Minister, Theresa May, has stated that the invocation of Article 50 of the Lisbon Treaty will happen by March 2017. So, at the moment, the financial markets feel like the lull at five minutes to midnight on December 31st
. Any minute now, the clock will strike and all the mayhem can commence.
You could argue that the mayhem started on June 24th
, but the nitty gritty of exit negotiations will be like manna from heaven for the news services and the speculation that accompanies it will undoubtedly create volatility in the years ahead. Having voted to leave the EU, Britain awaits the firing of the starting gun for those negotiations.
The details of the negotiations and the eventual outcome are unknowable at this stage but the impact will be far-reaching and the effects it will have on the GBP-AUD exchange rate are as unforecastable as they are unavoidable.
Good negotiators – like poker players – never show their hand in advance; and that leaves the air open for inevitable speculation. As long as you are able to protect against the worst case scenario, but take advantage of positive events, then your strategy is sane.
UK - robust data and confidence returning
The combined forces of the Confederation of British Industry (CBI), British Chambers of Commerce, Institute of Directors (IoD), Federation of Small Businesses (FSB) and the manufacturers’ organisation known as EEF, which jointly represent more than 400,000 UK businesses, have offered their full commitment to making Brexit a success. It hasn’t done much for the Pound, which starts 2017 roughly where it finished 2016, but it is certainly nice to hear some positive thought on the subject of the UK’s egress from the EU. And on their first day back at their desks after the Christmas break, UK traders were greeted by the best UK manufacturing survey in more than two years.
So, in spite of all the pre-referendum posturing, the UK economy hasn’t actually collapsed, but we have to be cautious; and Sterling is reflecting that caution. There is no doubt that many businesses that had planned investment into UK organisations have pressed the ‘hold’ button for now. The question of Britain’s post-Brexit access to EU markets and integration within harmonised taxes are obvious and understandable concerns and, unless the UK negotiators do an exceptional job, we will see investment flows seek avenues of easier access to Europe. The pressure is on to get it right.
Nonetheless, Sterling, which has recovered from its October weakness, is still looking oversold, even at €1.17 and US$1.22. I will cover the GBP-AUD rate in more details below.
AUD stronger on commodity rises and Chinese improvement
In a world where most interest rates are at 0% or thereabouts, the 1.5% yield offered by the RBA is very attractive. That base rate was cut to this record low level in August 2016. It weakened the AUD at the time, but a lot of water has passed under the bridge since then. The encouraging manufacturing data from China early in January gave the AUD a post-holiday boost and a slightly weaker US Dollar combined with higher commodity prices, has continued to add strength to the AUD.
Positive domestic data includes a 5.6% unemployment rate and that is considered as near to full employment as most economies can get. Hence, the AUD has every reason to continue to be strong for the medium term.
Strength in the Aussie Dollar is a double-edged sword, though. It makes imports more affordable, but it makes Australian exports less attractive to overseas buyers. However, since 2012, Australia has run an almost uninterrupted trade deficit as the overseas demand for mined products and raw materials has slowed.
The GBP-AUD rate was at its lowest level since 2013 back in October 2016, but the Pound’s recovery and a slowdown in commodity pricing has allowed this pair to bounce by 12 cents or so. Since November, this exchange rate has circulated around the 1.70 level with the range being between 1.68 and 1.72. For this exchange rate that is a phenomenally tight trading range.
That narrow range will change. Of that there is little doubt. The UK’s Supreme Court ruling over whether the government can invoke Article 50 without a parliamentary vote will cause some volatility. As will the actual invocation of Article 50 itself.
The outer range is currently 1.60 to 1.78, but there is a long-term downward trendline that is stopping the Pound from advancing above 1.72 at the moment. Either end of that range could be tested dependent on the timing of the UK events and the RBA’s eventual confirmation that its next rate movement will be upward. This assumes that commodity prices and both the Chinese and Australian economies continue to improve.
For AUD buyers
Any bounce in the GBP-AUD exchange rate is likely to hit heavy AUD buying interest around that A$1.72 level and again at 1.78 if seen. If that trendline resistance does give way, 1.78 is the high we saw in September and will cap the initial rally. Anything below 1.67 risks a more sustained fall to potentially 1.57; the same as the October lows.
For AUD sellers
These are still good times if you are looking to sell AUD and buy the Pound. We are currently within 6.5% of the lowest levels ever seen in the GBP-AUD rate since 2013 and that is not to be sniffed at. If you are risk-averse, you will cover some or all of your needs at current levels. If you have more time on your hands and are a bit more ambitious, you may be tempted to look for a break of the current support line at 1.68 and seek levels nearer the October lows in the mid 1.50s. However, waiting like this without any kind of risk protection in place could be very expensive because, if 1.72 does break, it would not take a lot for the Pound to make it to 1.78 and maybe even back up to 2015 levels.
Technical analysis by David Johnson
Back to the Top