• ​​A bumpy start to the year for AUD…
  • Asia’s influence on the Australian Dollar
  • Guidance for AUD buyers and sellers

By Halo Financial Team

The price of the raw materials exported by Australia has

a direct effect on the strength of the Australian currency, so when the price of oil or gold fluctuates, so does the Australian Dollar against its key currency partners – usually the US Dollar and British Pound. Lower commodity prices drag the Australian Dollar down; and the opposite is true when commodities are in a boom phase.

Asia’s influence on the Australian Dollar

Export/import links across Asia Pacific also have a marked effect on Australian Dollar strength: if China reports poor economic performance, this acts as a direct hit for the Australian Dollar.
Disappointing Chinese economic results in recent months have taken their toll on Australia’s currency, in its capacity as a major trading partner with China. Chinese service sector sentiment has been down, and this has had a knock-on effect on the AUD.

Recent rumours of a potential devaluation of the Chinese currency are creating a cloud over the Australian Dollar, as exports of commodities from Australia to China would suffer if this were to happen.

AUD coins

A bumpy start to the year for AUD…

The Australian Dollar has experienced an interesting start to 2018, with a number of notable ups and downs, mostly in response to geopolitical events, but also from economic pressures in Australia and its neighbouring jurisdictions.

Political pressures

The year started with pressure from the US Dollar in its capacity as a “safe haven” currency, as North-South Korea tensions showed signs of thawing; followed by US-China tensions intensifying. At the end of March, pressure piled on for the safe haven currencies of the Japanese Yen and US Dollar, leaving the Australian Dollar in third worst place in terms of currency performers.

There are political pressures closer to home, too, as support for the current Australian Prime Minister remains muted. A recent opinion poll showed that the coalition government spearheaded by Aussie PM, Malcolm Turnbull, lost its 30th consecutive opinion poll. Three prime ministers in Australia have lost their place down to lack of support over the past eight years, removed from their position by their own parties. This does not bode well for the current Australian government. 

The commodity conundrum

Commodity pricing uncertainty also sent shockwaves across the commodity currencies, with the AUD no exception.

Sterling stronger this spring?

With Sterling strengthening on Brexit negotiation hopes, the Australian Dollar fell to levels not seen against the Pound since the EU Referendum and the Brexit vote. Markets are now setting the spotlight on Sterling to see if it will strengthen throughout April, which is a trend that has emerged in recent years and could appear again on any positive news or perceived certainty about the UK’s economic and political future.

US Dollar stages a recovery

Despite poor performance from the US Dollar in recent weeks, it’s staging a comeback and has improved against its Australian counterpart, actually strengthening on positive economic results, despite continued global political uncertainty.

Monetary policy movement

Anticipation acted as a catalyst for the Australian Dollar as markets awaited important monetary policy updates from Australia’s central bank, the Reserve Bank of Australia (RBA). However, the RBA voted to keep interest rates at their current level, also intimating that there are unlikely to be any interest rate increases in the months to come. This was not the good news that markets were hoping for: while the low interest rates are supporting economic growth in Australia, hopes for a fast pattern of growth were dashed by the tentative approach from the central bank – a more aggressive stance on economic policy would have been seen as a vote of confidence for the Australian economy and therefore would have acted to up the ante for the Australian Dollar against its major currency pairings.

Insufficient pace of economic growth

The Australian economy, judging by the Gross Domestic Product figures released in the first quarter of 2018, has not performed as well as markets expected. This dampened spirits and diminished Aussie Dollar strength.

Add to this the consumer squeeze in Australia as house prices remain high and wage growth low, in turn reducing household spend and knocking confidence in retail markets. It remains somewhat of a vicious cycle for the Australian Dollar, as a stronger currency acts to slow inflation, which has real implications for the overall strength of the Australian economy.

Good news for Australian Dollar as we head into second quarter

The Australian currency started the new quarter in a positive position. Construction figures have grown over the past month – in contrast to a number of other countries that make up Australia’s key trading partners – and this result boosted the Australian Dollar against the Pound, nudging down the GBPAUD to below the A$1.80 level.

Despite building approvals being down, retail sales in Australia have improved to better levels than forecast, with sales increasing across key categories such as food, clothes and footwear, and household goods. The all-important Australian trade surplus figure came in above expectations; while the figure for exports remained much the same. Along with strong manufacturing results, this paints a more positive picture for the Australian economy. House prices also finally seem to be falling in Australian cities after reaching crisis point, lifting a little of the pricing pressure on Australian homebuyers and consumers.

However, the latest Australian consumer sentiment results were disappointing; along with the Reserve Bank of Australia indicating further delays in any interest rate raises, this helped the Pound to gain some ground against the Australian Dollar. Any interest rate rise, when it does come, will be a shock to the system after seven years at the same, low rate.

AUD coin on graph

What next for Sterling-Australian Dollar?

Sterling strengthened throughout March and into April and prices hit 1.85 a few weeks ago – it’s now trading sideways within a two cent range – with potential for further improvement to 1.8600.

That said, if GBPAUD breaks back down below 1.8200, it could open up a fall to the major support level, which comes in at 1.80. This is entirely feasible and we do expect that to happen at some point in the next month or so, although the markets have been full of surprises recently!

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.

For more information, infographics and the latest currency insights, visit www.halofinancial.com/news

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