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The two big worries hanging over AUD and GBP

Published: Tuesday 10 July 2018

  • ​​Fears over China relationship and trade
  • Is a ‘soft Brexit’ on the way?
  • Guidance for AUD buyers and sellers
GBP-AUD has been pretty stable over the last month, ranging just 0.32% from a low of 1.751 to a high of 1.795 in mid-market rates. The low point for Sterling was in early June, when the Aussie Dollar rose on a series of better than expected business data.
But all that could change, following two major announcements on Friday 6th July that could see stronger variations in the trajectories of the two currencies over the next month.
Fears over China relationship and trade

News that China was introducing like-for-like tariffs worth $34 billion in retaliation for a similar move by the United States, brought fresh fears that matter could spill over and affect Australia.

A few months ago, Chinese ambassador to Australia Cheng Jingye warned that Australia must do more to “increase mutual trust” between the two nations.

“If there is a growing lack of mutual trust, in the long run it may have some undesirable impact (on trade relations with China),” he told the Australia newspaper in April.

China is Australia’s largest trading partner, accounting for nearly a third of all exports, official data shows, so it has a lot to lose from a downturn in relations or any knock-on effects of trade wars.

According to the Organisation for Economic Co-operation and Development (OEDC), Australia is one of a handful of countries with the most to lose from a change in economic tariffs and foreign investment flows from China, with around the equivalent of up 2% of Gross Domestic Product (GDP) in exports potentially at risk.

Reserve Bank of Australia (RBA) Governor, Philip Lowe, warned just a month ago that the chance of “something going wrong in China” is among the biggest economic risks faced by Australia. He was talking specifically about rising debt, but an escalating trade war could also be very damaging.

The United States is also a major trading partner with Australia. Its $8.6 billion of exports in 2017 is the fifth highest total and the RBA has concerns about the recent turn of events over trade.

Just last week, Mr Lowe said, “One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons.

“Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US Dollar. In Australia, short-term wholesale interest rates have increased over recent months. This is partly due to developments in the United States, but there are other factors at work as well. It remains to be seen the extent to which these factors persist.”
Is a ‘soft Brexit’ on the way?

Ahead of the vital ‘awayday’ meeting of UK ministers who discussed the UK's future relationship when the country leaves the European Union in March 2019, the Australian Dollar gained against the pound.

And following news of a so-called ‘soft Brexit’  plan to create a free trade area for industrial and agricultural goods and the idea of setting up a “combined customs territory” the Pound initially rose towards 1.7885 against the Aussie Dollar.

The question is whether the deal will survive fierce internal unease from pro-Brexiteers including Jacob Rees-Mogg, Chair of the right-wing European Research Group, who see it as a betrayal and worse than a ‘no deal’ Brexit. Even if it does, it has to pass another tricky hurdle of being acceptable to the European Union itself.

Sterling is set to gather further strength if UK Prime Minister Theresa May can bring the divided cabinet together and unite Brexiteers and Remainers, but if she fails, the stakes are high.

Indeed, two days after the summit, Brexit Secretary David Davis resigned, followed by junior ministers, Steve Baker and Suella Braverman, who were all in the Department for Exiting the European Union.

Mr Davis said he was unable to continue as the current policies and tactics made it "look less and less likely" that the UK would leave the customs union and single market.

More resignations by unhappy ministers and MPs, will put more pressure on Mrs May and raise the possibility of a challenge to her leadership and even the possibility of a general election. It will also put more pressure on GBP against AUD.
Guidance for AUD buyers

For Aussie Dollar buyers, it may be worth converting some funds now and perhaps targeting 1.8500 with limit orders for further funds if you do want to hedge your bets.

Guidance for AUD sellers

For Australian Dollar sellers, a sensible move would be to place orders at 1.8100 and wait for the correction in the market.

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