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2016

Sterling – Australian Quarterly Forecast Oct - Dec 2016

Published: Thursday 06 October 2016

  • Brexit continuing to hamper Sterling
  • UK Data surprisingly robust
  • AUD stronger on high yield and positive economics but trade deficit widen
Great Britain and Australia are at opposite sides of the planet and are currently poles apart economically.  Perhaps not surprisingly, the British Pound and Australian Dollar are acting in similarly disparate manner.
That has brought the GBPAUD exchange rate to the lowest levels seen since 2013 and we could see new lows in the months ahead.

However, the exchange rate volatility has a dampening effect and we may well see this pair swing back in the other direction if conditions change and as the impact of the very strong Aussie Dollar and the exceptionally weak Pound affect their respective domestic economies.

Here, we will cover some of the possible outcomes for this exchange rate, the domestic and external factors that may influence those movements and other factors that are likely to have an impact on this exchange rate.
 
 
 
 

 Brexit – Britain in limbo

 
Having voted to leave the EU, Britain awaits the firing of the starting gun for those negotiations. When the new Prime Minister, Theresa May invokes Article 50 of the Lisbon Treaty, something she says she will do by March 2017, the clock will start ticking on the two-year negotiating timetable – and that established timetable is probably the reason it hasn’t happened. And so we wait.

The impact of this pause is palpable. Businesses are delaying investment decisions, every industry is making its case for the deal it wants to see and each individual EU and UK politico is espousing one view or another; almost all of it pure speculation.

The fact is that no one knows what shape the final agreement will take. Negotiations never start at the end point and this posturing from all sides is akin to boxers throwing a few jabs as they enter the ring to show their opponent how fast and sharp they are. 
 
 

UK data largely robust


In spite of all the pre-referendum posturing, the UK economy hasn’t collapsed. We didn’t need an emergency budget, taxes haven’t risen, employment is at a record high, consumer and business confidence has recovered from the initial post-referendum shock, the service sector actually grew in post-referendum July and the OECD, IMF and ONS have all stated that the impact hasn’t been as bad as they forecast. We were even told that the economic impact had been negligible ...thus far. 

We have to be cautious. Sterling is reflecting that caution. There is no doubt that many businesses that had planned investment into UK organisations have paused. The question of Britain’s post-Brexit access to EU markets is an obvious and understandable concern and, unless the UK meditators do a fine job, we will see investment flows seek avenues of easier access to Europe. The pressure is on to get it right.

Nonetheless, Sterling, which is down to €1.14 and US$1.28 at the time of writing, is significantly oversold at current levels, but could become further weakened if, as was suggested by one BOE member, that the UK’s Central Bank would cut the British base rate again before the Autumn Statement. I will cover the GBPAUD rate in more details below. 
 

 

 

AUD stronger on high yield and positive economics but trade deficit widens


In a world where most interest rates are at 0% or thereabouts, the 1.5% yield offered by the Reserve Bank of Australia is very attractive indeed. Any fears of further Aussie rate cuts were annulled by the Governor of the RBA, who ruled out any such activity.

Strength in the Australian Dollar is a double-edged sword, though. It makes imports more affordable and it makes Aussie exports less attractive to overseas buyers. However, commodity prices are so low at the moment that a more expensive Aussie Dollar might be ignored in the small amount of demand that still exists.
All of these factors have brought the Sterling-Australian Dollar exchange rate to levels not seen since 2013, but with the potential for the interest rate differential to widen again, there is still scope for further declines in this exchange rate.
 

GBP-AUD Forecast


Technically, the GBPAUD rate is precariously balanced on the same support level it found in 2013, A$1.67. The fall from the 2016 high of A$2.05 has been dramatic. The low we saw in the immediate aftermath of the Brexit vote was A$1.70 and the market is lower than that level as I write. Undoubtedly, the Pound is massively oversold at this level – more so than it has been for many years – but there is no sign of a recovery in the charts.  A rally beyond A$1.77 could take us to A$1.82 without much drama, but this could be a drawn out recovery, with Brexit talk constantly weighing on the Pound. If A$1.66 breaks on the downside, we are into a range not seen since the early part of 2013 – and that bottomed out A$1.45.


For AUD buyers


Any bounce in the GBP-AUD exchange rate is likely to hit heavy Aussie Dollar buying interest around that A$1.76 level. If that does give way, A$1.82 will cap the initial rally and, at this stage, the A$1.90 and A$2.00 levels seem no more than a myth.
  
 

For AUD sellers


These are great times if you are looking to sell AUD and buy the Pound. Being able to do so at exchange rates we haven't seen since June 2013 is a bit of a coup and, as the markets were forecasting a 'Remain' vote, is as unexpected as it is attractive. If you are risk-averse, you will cover some or all of your needs at current levels. If you have more time on your hands and are a bit more ambitious, you may be tempted to look for a break of the recent low and levels in the A$1.60 to A$1.65 range. The word of caution is that this exchange rate has fallen far and fast and so could be ripe for a recovery. Waiting for better levels without any kind of risk protection in place could be very expensive. 



 

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Quaterly forecast by David Johnson

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