- Central Bank avoids dovish tone
- First budget surplus in 12 years
- Australia businesses optimistic over China prospects
- Theresa May meets with Corbyn over Brexit
By Halo Financial Team
As at the end of 2018, the Pound has continued to rise and fall against the Australian Dollar, largely due to the Brexit rollercoaster. From January-March, typical GBP-AUD interbank rates varied from 1.774 to 1.883. The low came on 11th
January, when the Australian Dollar advanced on hopes that the US-China trade war was ending and news of strong retail sales. The high came on 14th
March, following on from Theresa May’s second Meaningful Vote defeat in the House of Commons.
Bank avoids dovish tone
The Reserve Bank of Australia (RBA) shows no sign of adopting the dovish tone of its New Zealand neighbour, which signalled a potential cut in interest rates. At its April policy meeting, it left the cash rate unchanged at 1.50% and avoided mention of urgent policy revisions.
The bank says the outlook for the global economy remains reasonable, but admits that international growth and investment has slowed and downside risks have increased. Reserve Bank of Australia (RBA) governor, Philip Lowe, says, “The Australian Dollar has remained within its narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.” However, the Australian labour market remains strong. The unemployment rate is 4.9%. The vacancy rate remains high and there are skills shortages in some areas. “The stronger labour market has led to some pick-up in wages growth, which is a welcome development. Continued improvement in the labour market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process.”
Gross Domestic Product growth slows
Gross Domestic Product (GDP) rose by just 0.2% in the December quarter to be 2.3% higher over 2018. “Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets.” Offsetting this are higher levels of spending on public infrastructure, an upswing in private investment and the steady growth in employment.
Australian housing market is evolving
The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent rises are low. Inflation remains low and stable, says the bank. “Underlying inflation is expected to pick up gradually over the next couple of years, although this has been taking a little longer than earlier expected.” The central scenario is for underlying inflation to be 2% this year and 2.25% in 2020. Headline inflation is expected to decline because of lower petrol prices earlier in the year, while underlying inflation is expected to remain broadly stable. ”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,” Dr Lowe concludes.
First budget surplus in 12 years
There was good news for the Australian economy in the early April budget, which forecast a surplus for the first time in 12 years. The federal budget surplus is expected to be A$7.1 billion in 2019/20 and A$11 billion in 2020-21. GDP is expected to grow 2.75% from now until 2022. It was hardly a surprise that with elections due next month, the budget would include tax cuts and investment initiatives. Lo and behold! - an additional 10-year, A$100 billion spend on road, railways and airports was announced. In addition, there was A$158 billion of tax relief for more than 10 million Australians, aimed at increasing spending and boosting the economy.
Tax changes could help elections
The Australian government also hopes the handouts will help it get re-elected. From 1st
July, low and middle-income earners will get a lump sum of up to A$1,080 a year, or A$2,160 for dual-income families. Tax brackets are being amended, with the 32.5% tax band being lowered to 30% from 2024-25. The top personal rate of 45% for those who earn at least A$200,000 from July 2024 will be one of the highest rates in the Organisation for Economic Co-operation and Development. Small businesses will also see lower rates. Those with a turnover below A$50 million will pay 25% by 2021-22. They can also benefit from an instant tax write-off for new equipment worth up to A$30,000.
Australia businesses optimistic over China prospects
Australian businesses are still mainly optimistic about prospects in China, in both the short-term and long-term, a new survey has found. Although levels have dipped in the last year. Almost three in four (71.6%) of businesses remain optimistic about their future prospects, according to the 2019 Australia-China Business Sentiment Survey.
81.5% of the respondents are optimistic about the five-year outlook. When compared to last year, businesses are 6.7 points less positive in their outlook in 2019 and 10.3 points more pessimistic than last year.
Altogether, 211 Australian organizations with operations, connections, or trade ties in China were interviewed. Roughly half of businesses increased their investment levels during 2018. In line with continued optimism, 59.7% expressed intent to continue to raise their investment in 2019. Most noticeable was the 10.7% year-on-year growth of market research and development.
The biggest concerns are the stability of China’s market and its government, as well as the US-China trade war. The most positive factor is China’s growth potential and growing domestic consumption. In addition, 58.3% of those surveyed identified the China-Australia Free Trade Agreement (ChAFTA) as a key area of opportunity. More than half benefitted from ChAFTA either directly or indirectly. Despite the slowing economy, 78.9% of Australian businesses believe they will make a profit in 2019, up 16 percentage points on last year. However, this year’s survey results show that Australian business are, in fact, more mature, prepared, and increasingly capable of managing China’s complex regulatory environment.
Theresa May meets with Opposition Leader Jeremy Corbyn over Brexit
In a surprise move, UK Prime Minister, Theresa May, has agreed to meet with opposition leader Jeremy Corbyn in a bid to come up with an agreed approach over Brexit and get it approved by parliament. Mrs May says her Brexit deal must be part of the solution. If the two leaders cannot reach agreement, various options will be put to MPs "to determine which course to pursue". Mrs May is also meeting Scottish First Minister, Nicola Sturgeon and Welsh First Minister, Mark Drakeford. The development comes after MP rejected all Brexit options under consideration for the second time in a week, MPs – making a no deal-Brexit “nearly inevitable”.
The move came in the second batch of Indicative Votes
set before the House of Commons on Monday, 1st
April. All four of Monday’s Indicative Vote options, designed to find which courses of action are most acceptable to MPs, were defeated in the Commons. The same happened the week before. The closest option to being won was from veteran Tory Ken Clarke, for a permanent customs union. It was defeated by just three from 273-276. Last week, it was lost by six votes.
After the votes, Brexit Secretary, Stephen Barclay, said, “The default legal position is that the UK will leave the EU in just 11 days’ time. To secure any further extension, the Government will have to put forward a credible proposition to the EU as to what we will do with that extra time… The only option is to find a way through which allows the UK to leave with a deal.” The Pound immediately dropped on the outcome, falling against the US Dollar from 1.311 to 1.304 on Interbank rates. A week earlier, on 29th
March, the day that Britain was supposed to be leaving the European Union, MPs ruled out Prime Minister Theresa May’s Brexit withdrawal agreement for the third time. In a desperate attempt to gain some momentum, Mrs May split the withdrawal element of her deal from the political part.
But MPs still voted the ‘blind Brexit’ deal down by 344 votes to 286 - a majority of 58. There are now fears that with the UK set to leave the EU on 12 April at time of writing, there is not likely to be enough time to legislate for a deal. If the UK wanted a further extension, it would need to hold European elections, says Mrs May. “The implications of the House’s decision are grave. The legal default now is that the United Kingdom is due to leave the European Union on 12th April.
An emergency EU summit has been hastily arranged for Wednesday 10th
April. The European Commission says, “a ‘no-deal’ scenario on 12th
April is now a likely scenario.” In a bid to finally get her EU withdrawal agreement approved, Mrs May put forward the withdrawal agreement part of her Brexit deal without the political declaration. Even so, the European Commission said had the deal passed, the UK could leave the European Union without passing the political declaration. British business leaders again condemned the situation as “a failure” and “a disaster” for the UK economy and jobs.
Mike Cherry, the chairman of the Federation of Small Businesses (FSB), says, “On the day that we were supposed to be leaving the European Union, all we have is yet another political failure to chalk up. Responsibility for this deepening political crisis lies squarely at the feet of politicians who have clearly stopped listening to the business community.”
Stephen Phipson, Chief Executive Officer of the manufacturers’ organisation, Make UK, says, “This now makes the nightmare of a “no-deal” scenario more likely than ever. This would be a disaster for the UK economy as a whole and for the 2.7 million manufacturing jobs around the UK.”
What next for Sterling-Australian Dollar?
The fortunes of Sterling over the next three months are still likely to be heavily influenced by Brexit. In Australia, the run up to the forthcoming election and the US-China trade wars outcome are all major triggers for the Australian Dollar.
If you are planning to exchange GBP into AUD, consult your Halo Financial Currency Consultant as soon as possible.
Guidance for AUD buyers
After breaking the resistance level that was capping GBPAUD at 1.8450 on 27th Feb, the rate rallied to 1.8880, which was a new multi-month high. It’s currently trading sideways 1.82-1.88 and has been holding that range for the last month. Top of the channel comes in at 1.8950 and that’ll cap the move higher unless there’s a massive Brexit deal rally. That would likely see a 3-5% rally up to 1.94-1.95 level (that’s the perceived wisdom from analysts in the industry).
Guidance for AUD sellers
Beware… On the downside, it’s enormous IF we leave EU with no deal, you’re looking at a 1.65 downside target… Otherwise, look to sell your AUD in the 1.82-1.84 range.