• ​​Economy improving but cash rate is held
  • Trade war impact ‘could last a decade’
  • Party conference performance under scrutiny

By Halo Financial Team

The story so far…

Since the end of August, following the departure of previous Prime Minister Malcolm Turnbull and the subsequent takeover by Scott Morrison as Australia’s 30th prime minister, Sterling has been noticeably stronger against the Aussie Dollar. In the last three months GBPAUD ranged from a low of 1.73 in August using typical mid-market rates and edged up to 1.75 towards the end of the month. But as a result of the political turmoil, the pound hit 1.80 and reached a high of 1.839 before dropping back towards the 1.80 mark again at the end of September.

Economy improving but cash rate is held

The Australian economy is improving, the Reserve Bank of Australia (RBA) has indicated, but it is still holding the Cash Rate at 1.50%. 

Average growth is forecast at above 3% in 2018 and 2019. Governor Philip Lowe says in the latest rate update, “In the first half of 2018, the economy is estimated to have grown at an above-trend rate.” He adds, “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” 

Australian Currency isolated on white - Halo Financial

Unemployment is at 5.3%, the lowest for almost six years and vacancy rates are high. As a result, over the next couple of years, Australia’s jobless rate is expected to fall even further to around 5%.

Inflation is around 2%, but is expected to pick up in 2019 and 2020. The annual growth in house prices has fallen to 5.5%, with conditions in Sydney and Melbourne easing, says the RBA.  

The bank focused on three issues in the last year, it says in its annual statement. “The first was the risk to the global economy from a move towards protectionism. Australia is a major beneficiary of the open, rules-based international system and has a strong stake in this system continuing. A second issue was the subdued growth in wages in Australia. The slow growth in wages has boosted the number of Australians with a job, but has also led to slower income growth for many individual households and less inflation pressure than otherwise. A third issue was the high level of household debt in Australia, which carries certain risks. The Bank has worked closely with the other members of the Council of Financial Regulators to ensure that lending standards are appropriate for this environment.”

However, on the international front, the RBA points out that growth in China has slowed and there is ongoing uncertainty caused by the direction of international trade policy in the United States.

Trade war impact ‘could last a decade’

Since Halo Financial’s last GBPAUD quarterly briefing, the United States has escalated its trade war with China, adding $200 billion of tariffs to Chinese products to the $50 billion already in place. Those taxes start at 10% and will rise to 25% from the new year, unless the two can agree a deal. 

China, which is more restricted in its response as it imports fewer US goods, says it intends to impose taxes around $60 billion of US products. But President Trump has warned, in return, the United States is considering adding an extra $267 billion of tariffs on Chinese goods. 

All this matters to Australia, as China is the country’s biggest trading partner and the United States the fifth highest. 

Financial giant KPMG Australia, in its report, Trade Wars: There are no winners, says any escalation of the trade war is extremely serious for Australia. “Its impacts would last almost a decade, with an estimated loss of national income of nearly half-a-trillion Dollars over 10 years, or the equivalent of losing just over 40% of last year’s household disposable income. Job losses in Australia would also be significant under such a scenario, falling almost 60,000, and pushing real wages down by about $16 per week for the average worker.”

Even in a limited trade war between the US and China, Australia’s Gross Domestic Product (GDP) would be about 0.3% lower after five years and it would incur a real GDP loss of A$36 billion over a decade, says the report. “This is mostly due to the reliance of Australian commodities as intermediate inputs in the production process in China, and the likely loss of services exports in education and tourism to China.”

If the trade wars escalate, with bilateral tariffs increased to 25%, Australia could lose 0.5% GDP over five years and if it the trade war between the US and China spills over to the rest of the world with all countries imposing 15% tariffs, Australia GDP could lose out by 2.4%, economic models suggest.

But there should be no retaliation, the report advises.  “Australia, like other countries, has nothing to gain and everything to lose from getting involved in the escalating trade war between the US and China. If increasing protectionist measures escalate into an all-out trade war, then economic pain worsens significantly for everyone.”

The Business Council of Australia, a forum for chief executives of large companies, says the country should “double down on getting competitive” and increase its scope of trading partners and increase trade with Britain, Europe and India.

Party conference performance under scrutiny

Sterling’s recent gains against the Australian Dollar could easily be reversed, if there is further bad news on Brexit or Prime Minister Theresa May has a poor Conservative Party conference in Birmingham. With just six months to go until Brexit on 29th March 2019, and no agreement in place, Sterling is still dominated by the saga. Almost daily, new theories emerge about the effects of no-deal Brexit on the economy, transport, health and other areas of life. 

What next for Sterling-Australian Dollar?

Any Brexit agreement over the next three months will see the Pound strengthen against the Australian Dollar, while any sign of the Australian economy further strengthening and RBA considering a rate rise, would see AUD moving higher. However, if British Prime Minister Theresa May runs into trouble at the party conference or sees challenges from Boris Johnson or other heavyweight rivals for the leadership, then that would weigh on the Pound.

Guidance for AUD buyers

Australian Dollar buyers have had a few chances to purchase above 1.8000 and any move up towards the 1.8350/1.8400 should be viewed as an opportunity to buy. That level has held and is a very strong area of resistance in the medium term. The currency pair has not traded above there in over two years and is unlikely to break any time soon. If 1.7800 does not hold the next area of support is around 1.7500.

Guidance for AUD sellers

The relative strength indices’ (RSI) are not suggesting a significant move one way or another so a period of consolidation is likely. Sellers may be best sitting on the side-lines awaiting clearer direction. Any move towards 1.75 should be taken advantage of in the short term. Only a break above 1.8500 would suggest that sentiment has changed and that the market will move substantially higher.

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

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