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Australian Dollar Research Report

Published: Monday 11 September 2017

  • ​​Torrid times for the Pound
  • Interesting times for the Australian Dollar 
  • Guidance for AUD buyers and sellers
By David Johnson

Torrid times for the Pound

The past couple of months have delivered a real mixed bag of economic results for the UK, with positive manufacturing data, lacklustre construction industry results and a slowdown of growth for the service sector. Brexit negotiations rumble on, with Sterling moving up and down as the uncertainty continues. That trajectory has been more down than up. Not much of note is being announced as the negotiations progress, mostly conjecture and rhetoric, but markets are keeping a close eye out for any key developments. Sterling is struggling along and essentially at the mercy of other currency movements at this delicate stage.

Interesting times for the Australian Dollar

It’s been a busy month for the Australian Dollar. At the start of August, the Reserve Bank of Australia (RBA) kept interest rates on hold at 1.5%. The Australian Dollar remained strong in spite of concerns being raised about its strength and what this meant for imports and exports. Following this, a raft of positive economic data from China was released and strengthened the commodity related currencies, including the Australian Dollar. A speech from the RBA’s Assistant Governor further boosted the Aussie Dollar. This was balanced, however, by lower than expected trade data from China, putting pressure on the Australian Dollar due to China’s status as Australia’s number one export market.

From an economic perspective, the unemployment rate in Australia stayed the same at 5.6% for July, with the number of people in employment rising by 27,900 in the month to July. While policymakers welcomed this boost to jobs, concerns were raised about wage growth, which has slowed in the past three months. In part from the lower wage growth and as consumers began to feel the pressure of rising energy bills and an increasingly unaffordable housing market, consumer sentiment was reported as low in Australia, while business confidence remains high. This failed to affect the Australian Dollar negatively, as it continued to build strength.
Unexpected events that did affect the Australian Dollar were the North Korean missile testing over Japan and the hydrogen bomb that triggered a significant earthquake. Investors turned away from the Australian and US Dollars towards relative safe haven assets like Gold, the Swiss Franc and – ironically enough – the Japanese Yen.

The Australian economy grew 0.8% in the second quarter of 2017 – a marked increase from the first quarter of the year. The figure was not necessarily representative of overall growth, however, as the month showed a considerable rise in public sector spend and a slowing private sector behind the scenes. Markets are now speculating that there could be a noticeable shift in the other direction in the figures for the third quarter, so this sentiment meant that the Australian Dollar didn’t receive the anticipated boost, and weakened slightly.

Latest economic news for Australia shows that retail sales stagnated in July, and June’s growth was downgraded to just 0.2%. Clothing sales and department store activity dropped but Australians continued to spend on dining out. These figures don’t seem to tally with the recent consumer data, but, alongside the strengthening currency and somewhat out of control housing market, provide a warning sign for the RBA. The latest economic news caused volatility for the Australian Dollar, but it has stayed much the same against its key currency pairings, Sterling and the US Dollar.

Guidance for AUD buyers

In spite of all the negative rhetoric, there is still a medium term upward trend in the Sterling – Australian Dollar exchange rate. That trend has been in situ since the latter part of 2016. There is plenty of evidence of Sterling buying around the current trendline level of A$1.6125 and that GBP buying has kept this pair above the trendline on five separate occasions over the last year. If that level fails, then a return to the October 2016 low of A$1.56 is highly likely. In the short term, buying AUD around A$1.63 has been the best option through august and September so far but a break above that level would target A$1.6550 and maybe even the A$1.67 long term downward trendline. 

Guidance for AUD sellers

In historical terms, these are still very attractive levels for AUD sellers. This rate is supported at A$1.6125 and, as mentioned above, if that breaks, we may see A$1.56 if there is enough momentum. Risks of a break above A$1.63 and possibly A$1.6550 should be noted and anything above there would signal a significant change of direction.
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