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Politics trumps economic performance when it comes to currency market movements

Published: Thursday 08 March 2018

  • ​​Multiple global factors could weigh on Australian Dollar
  • Commodities and export markets come into play
  • No change to Australian monetary policy
  • Guidance for AUD buyers and sellers
By Alastair Sweetman

Multiple global factors could weigh on Australian Dollar

There’s plenty to keep the currency markets busy right now – both economically and politically – and we could see some marked exchange rate movement in either direction. Fight for flight for the US Dollar – in response to US and global political activity and also in the US Dollar’s capacity as a “safe haven” currency – will inevitably take its toll on Australian Dollar strength.

As hopes emerge for a loosening of North/South Korea tensions, this has bumped the Australian Dollar back up against the US Dollar, and markets await the latest Australian Gross Domestic Product figures to confirm the direction of travel for both the Aussie Dollar and for the Australian economy.

Commodities and export markets come into play

As a commodity currency, the potential for lower commodity prices could also have knock-on effects and push the Australian Dollar down. The Australian Dollar has been at the mercy of volatile commodity prices recently, as well as ripple effects from Chinese economic performance, with Australia’s close export ties to China.

No change to Australian monetary policy

The Australian Dollar enjoyed a short boost in the run up to the Reserve Bank of Australia’s (RBA) latest policy announcement, however, on the news that there will be no interest rate hikes planned for the foreseeable future, the Australian currency fell back down. A status quo arrangement for monetary policy doesn’t inspire confidence in rapid economic growth. And while the low rates are underpinning gradual Australian economic growth, Australian consumers are squeezed by continued low wage growth, affecting household consumption and retail figures. Once again, the RBA voiced concerns about a stronger Australian Dollar slowing inflation and the economy.

Economic data doesn’t do much for Australian Dollar

Positive data earlier in the month didn’t help the Aussie Dollar much. Homebuilding and business statistics all read well, and you would have expected it to make some imprint on Australian Dollar strength, but when retail sales figures came in below par, it proved difficult to gain ground.

Gross Domestic Product figures disappoint

The strength of the US Dollar and wider risk sentiment across global markets are more likely to have an effect on the strength of the Australian Dollar that any economic announcements in the current uncertain climate, although the GDP figures and further commentary from the RBA governor, Lowe, are watched closely for signs of the health of the economy. The latest figures showed that the Australian economy did not grow as quickly as anticipated; and, despite a boost in household consumption, exports fell. This, understandably, left its mark on the Australian currency and the Australian Dollar weakened on the results; although markets were considering that this might be the case, given the maintaining of the current record low interest rates, it was not priced into markets.

Guidance for buyers

GBPAUD has reached 1.80; it hit that level in December 2017 and again in early February 2018, but has not managed to break higher yet. Between the 1.80 tests, the rate fell back to 1.71, but it has quickly recovered and is currently trading sideways in a narrow three cent range of 1.75-78. These are good levels to be trading, so if you have a reasonably short term requirement you may wish to consider trading now.

If the rate does break up through 1.80, then expect a climb towards 1.82, so automated orders at 1.80 could be a good idea.

Guidance for sellers

As ever, the Australian Dollar still remains reasonably strong when you look at the historical range on GBPAUD; anything below 1.80 is a good level to be selling. If the Bank of England decides to hike interest rates twice this year, the Pound could continue its upward path against the Australian Dollar.

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