- GBPAUD falls on Brexit
- UK economy expected to contract
It’s a week since the UK voted to leave the EU and in the interim, the UK Prime minster David Cameron resigned, the credit rating has been cut, Labour had a vote of no confidence in Corbyn and the Tories are working out on who’ll be taking over from Cameron to implement Article 50. So it’s a bit of a mess then. The Pound is also in a bit of a mess against all majors, down 5% against the Aussie on Friday hitting 1.8017 in the morning before recovering a couple of cents. Further losses then occurred on Monday as more selling saw the Pound fall through 1.80 reaching 1.7750, a 2 year low.
Fearing the worst, central banks provided emergency liquidity in the aftermath of the vote, keen to avoid another credit crunch of 2008 and a run on bank stocks and cash points. This week it’s become clear that the government are going to delay the implementation to Article 50 as much as possible and that seems to have calmed the market somewhat. UK stocks has been supported over the last few days as the market is now pricing in an interest rate cut from the Bank of England in August which has sent stocks higher and for the time being at least, the Pound’s fall has abated.
If you look at bank forecasts however, the consensus appears to be further weakening of the Pound and one would believe that to be the case. As the UK economy starts to contract with the drop in investment and corporate HQ’s relocating, business confidence will drop and output will fall – as to how much by, we shall see, but certainly the ingredients are there to see further deterioration in the value of the Pound.
Further afield, central banks are spooked and it’s unlikely that Fed Chairman Yellen will be keen on raising US interest rates whilst the Bank of Japan may elect to lower theirs even more.
So with the lack of triple A rated sovereign debt (the UK losing theirs), the Australian proposition is more attractive now than in the recent months. They have a AAA credit rating, stable political landscape (compared to the UK and arguably the US) and relatively high interest rates – drawing foreign money into Australian government bonds and other assets, pushing the Aussie Dollar higher.
Much like the market is pricing in a rate cut from the Bank of England, there’s an expectation of a rate cut from the RBA in August by 0.25% as well but that’s unlikely to take the sheen off for foreign investors, the reality is there are fewer territories now that have attractive investment yields and once they’ve cut they may well hold off further rate cuts.
Technically GBPAUD has now traded back to 2013-2014 levels with the next downside target 1.7450-1.7500 (2013 high and 61.8% retracement of the 1.4380 low in 2013 to the 2015 high of 2.2370). On both the monthly and weekly charts, GBPAUD is not oversold, i.e. there’s room for it to go lower. On the daily chart, the low has been 1.7750 and the bounce this week has got as far as 1.82 so we’re not talking about much of a bounce.
With the uncertainty surrounding Brexit I think it’s fair to say to AUD buyers that if you need to get money over for living costs, property development, pensions, it may be safer to convert a portion of your funds now. It will be interesting to see where GBPAUD closes this week, whilst I think it’s got more downside over the medium term, if it can hold 1.80-1.82 level then a bounce to 1.84 could be seen.
For sellers, I would recommend selling a portion now and look for opportunities to sell at lower levels in the coming months.
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Technical analysis by Alastair Sweetman