We use cookies on this site to improve your experience and help us provide you with a better website. An explanation of the cookies we use and their purpose can be found within our Cookie Policy. Your continued use of this site means you consent to the use of cookies.


Brexit ‘no deal’ worries cause GBPAUD to dip

Published: Tuesday 21 August 2018

  • ​​Economy is ‘on track’
  • Australia’s population hits 25 million
  • ‘Chance of Brexit no-deal is 50/50’
Sterling and the Australian Dollar were coasting along at around 1.75-1.76 mid-market rates for most of the month, until early August, when the level dipped to 1.729, following rumours that British Prime Minister Theresa May was making serious preparations for a no-deal Brexit. Then, over the next week, the Pound gradually recovered and GBPAUD again currently sits close to 1.76. The variation has been 0.3% over the last month.

The blip apart, the GBPAUD pairing has been fairly stable over the last month. By way of comparison, against the US Dollar, the Australian Dollar has fallen by more than 10% since the start of the year. It is also down a similar amount against the Japanese Yen. It’s not that the Australian economy is performing badly, but it is more about the current seemingly impenetrable strength of the US currency and the role of the US Dollar and Yen as ‘safe havens’ in times of uncertainty.

Economy is ‘on track’

Indeed, the Reserve Bank of Australia (RBA) says in its newly-published quarterly Monetary Policy statement that the economy is on track and is expected to achieve gross domestic product (GDP) growth of more than 3% in both 2018 and 2019, plus lower unemployment and inflation rising above the current 2% level over time.

One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. However, the central bank says the global outlook remains positive and above trend. Business conditions are also healthy, particularly for goods-related sectors.

House prices are also falling in Australia. Although Sydney has just been named one of the world’s most unaffordable cities for housing, overvalued by 50% when compared with average wages, according to The Economist’s latest Global House Price Index, prices have fallen by around 4.5% in the last year.  Prices in Melbourne have also continued to ease, says the RBA, and rent rises across the country remain low.

The low level of interest rates is continuing to support the Australian economy and the central bank left its Cash Rate at 1.5%, which has been at that level for two years now.

The bank says, “Overall, the Australian economy remains on the path it has been for at least the past year and a half. Although inflation is likely to be a bit lower in the near term, this is expected to be temporary. Further gradual progress on both lowering unemployment and bringing inflation closer to the midpoint of the target is expected over coming years.”

The risks to global growth from trade protectionism have increased, the reserve bank admits, which could affect Australia’s trade with China. However, growth in the United States and a downturn in the Australian Dollar could boost growth at home, it believes.

“In light of this, and recent policy actions by Chinese authorities to manage financial risks and slowing growth, there is uncertainty about the outlook for China, which is a key trading partner for Australia. However, growth in the United States could be stronger than expected, which would boost global growth. A depreciation of the trade-weighted Australian Dollar, in an environment of US Dollar strength, would also be positive for the domestic outlook for growth and inflation.”
Australian Money - all 100 AUD notes - Halo Financial

Australia’s population hits 25 million

The population of Australia reached 25 million this month, thanks to strong immigration and higher than expected birth rates. In fact, one baby is now born in Australia every 125 seconds, according to Australian Bureau of Statistics data.

One person arrives to live in Australia every 61 seconds, while one Aussie national leaves to live overseas every 111 seconds. Overseas arrivals account for 62% of Australia’s population growth.
The annual population growth is 1.6%, some 0.4% higher than the global growth and the highest among G12 nations.

The country’s population growth is set to continue and reach 36 million by 2050, is it predicted. Almost half of that number, 16 million, are set to live in Sydney or Melbourne, boosted by the 90% of new permanent residents who migrate there.

Migration is a hot topic in Australia, but skilled migrants boost the economy, the International Monetary Fund argues. It estimates that Australia’s migration program will add up to 1% to annual average GDP growth from 2020 to 2050 because it focuses on skilled migrants of working age, which limits the economic burden of Australia’s ageing population.

‘Chance of Brexit no-deal is 50/50’

As each week goes by with no resolution of the terms under which Britain is set to leave the European Union on 29 March 2019, the chance of a ‘no deal’ Brexit becomes more likely.

Latvian foreign minister, Edgars Rinkēvičs, who has just had talks with his British counterpart, Jeremy Hunt, put it at 50-50.

Due to the time needed to prepare for whichever outcome is decided, any deal has to be agreed by October, it is generally acknowledged.

The currency markets are generally worried about the possibility of a ‘no deal’ Brexit, as it brings huge uncertainty, hence the dip in Sterling against the Australian Dollar – and other currencies – in early August as markets started taking the possibility more seriously. The weakness came as Foreign minister Jeremy Hunt admitted, “Everyone needs to prepare for the possibility of a chaotic no-deal Brexit,” 

The fear and uncertainty has been compounded by scare stories over the effects of no-deal on the UK, from 12% being added to the typical weekly groceries bill and £1,000 a year to overall household bills; a scarcity of vital drugs and blood products to transport chaos, including planes being unable to fly.

However, a new challenge is being mounted in London’s High Court by British Expats who say the recent ruling by the Electoral Commission of undeclared spending by the Vote Leave group, should make Brexit invalid.

The judicial review against UK Prime Minister, Theresa May, has been submitted by the UK in EU Challenge group, which represents Britons living in France, Italy and Spain.
The government resists the action, arguing it is out of time and that a similar challenge has previously been dismissed.

Meanwhile, until the situation is clarified, GBP is vulnerable to swings against the AUD.
Guidance for AUD buyers

GBPAUD broke out of the uptrend that had been in place since July last year and initially fell from 1.7800, which was the break point to a low of 1.74. It subsequently recovered back up to the bottom of the uptrend and then sold off hitting fresh lows at 1.7280. Since then, it has recovered, but remains in a downward channel with the top of the range now 1.75 and the bottom 1.72. I think with the concerns over the a no-deal Brexit growing that there’s a chance that GBPAUD could sell off further; if 1.7200 gives way, then expect further falls to 1.70 initially. So, it’s worth targeting 1.74 initially, with 1.76 the topside target and a Stop loss order below 1.70.
Guidance for AUD Sellers

Similarly, it’s worth targeting 1.7200 on the downside, with a Stop loss order above 1.7500. It’s true that GBP crosses are not particularly volatile at the moment; with the UK government on its summer break, it’s likely that volatility will increase again into September, when UK and EU politicians try to get somewhere with the Brexit negotiations. The fact is, if we get to October and still haven’t got anything agreed for a deal, then the Pound will suffer further losses, giving you a better return on your Australian Dollar funds.
GBPAUD - Research Report - August 2018

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