After weakening for much of 2016 and early 2017, GBP/AUD has mostly traded in a range in 2017. While the pair strengthened in March, it weakened significantly by August as the Australian dollar strengthened. Despite details regarding Brexit remaining scarce, the pound has managed to modestly strengthen in 2017.
The British pound is currently slightly higher against all major currencies except the euro and the Australian dollar. Yesterday, the pound ended the day down sharply against the US dollar. Yesterday's sell-off was accompanied by accelerating trading volumes in British pound futures, which were higher relative to both the previous session and 30-day averages. The combination of a sharp move lower and higher volumes suggest that traders sold the currency with conviction. Today's GBP/USD trading range is 1.2920 - 1.3260.
Thanks to a combination of slowing retail sales data, concerning Brexit headlines and pressure on the euro, the pound had plenty of reasons to weaken yesterday. Starting with the data, year-over-year retail sales growth slowed to 3% in September. The figures were disappointing as comparable retail sales at this point last year were slowing in rate-of-change terms. As consumption is a significant component of the U.K.'s economy, slowing retail sales have broader implications for economic growth in the third and fourth quarter of this year.
Turning to Brexit developments, the pound sold off sharply yesterday after Theresa May said that the EU's proposal on the border was unacceptable. May also suggested that she would be willing to extend the transition period "for a matter of months" in order to address ongoing differences. Earlier today, sterling ticked up following Michel Barnier's comments saying that a Brexit deal was 90% complete. Barnier did, however, suggest that the Irish backstop issue remains a significant roadblock. As trade negotiations remain volatile, Brexit-related news continues to have a significant impact on the pound in the short term.
Lastly, the pound is likely to remain under pressure thanks to slowing growth in the Eurozone. As described in today's euro daily update, Italian debt concerns continue to weigh on the common currency. Given the U.K.'s significant trading relationship with the Eurozone, the pound is closely correlated to the euro. Our outlook on the pound remains bearish.
GBP/USD is currently above 1.3050. EUR/GBP is up slightly, with the pair trading above 0.880. The pound is down against the Australian dollar and up against the Canadian dollar. GBP/AUD is currently above 1.8260, while GBP/CAD is above 1.7080.
|October 16||Claimant Count Change SEP||18.5K||14.2K|
|October 16||Unemployment Rate AUG||4%||4%|
|October 16||Average Earnings excl. Bonus AUG||3.1%||2.9%|
|October 16||Average Earnings incl. Bonus AUG||2.7%||2.6%|
|October 17||Core Inflation Rate YoY SEP||1.9%||2.1%|
|October 17||Inflation Rate YoY SEP||2.4%||2.7%|
|October 17||BoE FPC Minutes|
|October 18||Retail Sales ex Fuel YoY SEP||3.2%||3.6%|
|October 18||Retail Sales YoY SEP||3%||3.4%|
|October 19||Public Sector Net Borrowing SEP||£-3.26B||£-4.76B|
|October 19||BoE Gov Carney Speech|
The Australian dollar is currently strengthening against all major currencies. The aussie is up the most against the Canadian dollar today. Yesterday, the Australian dollar ended the day slightly lower against the US dollar. Notably, trading volumes in Australian dollar futures accelerated for the fourth session in a row, rising above 30-day averages. While rising volumes are usually notable, this was not the case yesterday as prices only moved by a small degree. Today's AUD/USD trading range remains 0.7080 - 0.7350.
While yesterday's employment changes slowed relative to the previous month (and fell below consensus expectations), foreign exchange traders appeared to be more focused on the falling unemployment rate. While the US dollar was up sharply yesterday, AUD/USD ended the session mostly unscathed. Earlier this week, the RBA's Debelle suggested that wage growth is likely to remain weak thanks to a relatively high rate of unemployment. The RBA has previously communicated its desire to see accelerating wage growth before raising interest rates. Yesterday's data suggests that unemployment is now falling, in turn making a rate hike more likely.
Looking at the aussie today, the currency is rallying in line with a rebound in riskier assets. Following a strong session for most major Asian equity markets this morning, US equity markets and commodities are also rallying. Looking across different asset classes, the S&P 500 is currently up by 0.3% while copper prices are up by more than 1.5% today. As a 'risk on' currency, day-to-day trading in the Australian dollar is often a function of developments in riskier asset classes.
Despite today's rebound, slowing global growth (now with the US entering a slowdown) means that the Australian dollar is likely to remain under pressure. Our outlook on the Australian dollar remains bearish.
AUD/USD is up and trading just above 0.7130. EUR/AUD is flat and trading above 1.6140. GBP/AUD is down slightly and trading above 1.8280. AUD/JPY is up, and trading above 80.20.
|October 16||RBA Meeting Minutes|
|October 17||RBA Debelle Speech|
|October 18||Employment Change SEP||5.6K||44.6K|
|October 18||Full Time Employment Chg SEP||20.3K||33.7K|
|October 18||Unemployment Rate SEP||5%||5.3%|
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Significance of the GBP/AUD pair
The British pound is the fourth-most traded currency in the world, and a major reserve currency behind the US dollar, euro and the yen. The pound tends to reflect underlying economic conditions in the United Kingdom. The Australian dollar is the world’s fifth-most traded currency. Given the country’s significant export relationship with China (and restrictions on trading the Chinese yuan), the Australian dollar is often seen as a proxy for emerging market growth. The British pound to Australian dollar exchange rate has been gradually weakening since 2000 thanks to the ongoing commodity market rally. In more recent times, GBP/AUD has depreciated sharply thanks to Brexit in mid-2016 and the ongoing Australian dollar rally. Relative GDP growth rates for the United Kingdom and Australia are shown below:
2007 – mid-2008: Pre-financial crisis weakness
Prior to the last global financial crisis, the Australian dollar enjoyed a significant rally. The currency was attractive to global investors given that it is heavily traded, backed by a developed market economy, and offers relatively high interest rates. The underlying Australian economy also did well during this time, thanks to accelerating global demand for industrial commodities such as copper and iron ore. For investors engaged in the global ‘carry trade’ (borrowing low yielding currencies and investing in higher yielding currencies), going long the Australian dollar was a good bet. As part of this trade, investors mostly borrowed low-yielding currencies such as the Japanese yen. As more and more investors took part in the carry trade while Australia’s economy accelerated, the currency strengthened accordingly.
Looking at the pound, the currency enjoyed years of strength prior to the crisis, thanks to the boom in the UK’s financial services-led economy. On the other hand, weak US economic data (particularly in light of growing problems in the US housing market) helped to limit US dollar strength. While the pound did well in this era, the Australian dollar was relatively stronger. GBP/AUD made a long-term bottom during the summer of 2008 around 2.05.
2008: the Eurodollar crisis
While the financial crisis began as a domestic US affair, it soon engulfed the entire world. As we have described in a previous commentary, the real story from that era was that the global Eurodollar funding mechanism collapsed. Prior to the crisis, financial institutions borrowed heavily in offshore US dollar markets and invested the proceeds in US mortgage bonds and international debt. Once Eurodollar lenders began to doubt the creditworthiness of their counterparties, banks found themselves unable to roll over US dollar liabilities. As a result, the US dollar strengthened sharply against most currencies.
Both the Australian dollar and the British pound began selling off aggressively in July 2008. Given the popularity of the carry trade and the Australian dollar’s connection to emerging markets, investors sold the currency aggressively (particularly against the US dollar). Looking at the pound, investors also dumped the currency as European banks had borrowed heavily in the Eurodollar financing market. Given London’s status as Europe’s largest financial center, few were willing to hold pounds when fears of a dollar shortage began rising.
GBP/AUD peaked around 2.65 in October 2008. The pair then depreciated sharply and ended the year back around 2.07. By the end of January 2009, GBP/AUD had once again strengthened to around 2.28.
2009 – 2012: Australian dollar rebound and limited pound strength
Thanks to a significant Chinese economic stimulus program, high rates of immigration, and a substantial depreciation of the currency, Australia escaped a recession following the financial crisis. The United Kingdom, on the other hand, was heavily reliant on its Europe-focused financial services sector. While growth accelerated in 2010, debt issues in peripheral Eurozone countries in 2011 once again led to weaker GDP British growth.
As a result, GBP/AUD sold off between 2009 until the end of 2012. From around 2.28 at the end of January 2009, the currency pair weakened down to around 1.45 by March 2013.
2013 – mid-2016: European resurgence, emerging market downturn
By early 2013, the fortunes of the Eurozone were turning thanks to various European Central Bank bailout schemes. Accelerating GDP growth in the region led to a resurgence of British GDP growth. In Australia, economic growth peaked in 2012 and began decelerating. The year 2012 marked the peak for various industrial commodity prices (Australia’s main export to China), as well as Chinese GDP growth.
Looking at GBP/AUD, the exchange rate strengthened to around 2.20 by September 2015. While the pair fell in early 2016 (as commodities began rebounding alongside Chinese GDP growth), GBP/AUD surged prior to the Brexit referendum vote. Prior to the vote, few believed that the UK would vote to leave the European Union. On June 22, 2016 (one day prior to the vote), GBP/AUD traded close to 1.96.
Mid-2016 – 2017: trading in a channel
Following the shock outcome of the Brexit vote, GBP/AUD began falling. The pair ultimately bottomed in October 2016 around 1.60. Looking at other pairs (such as GBP/USD and EUR/GBP), the pound had broadly weakened following the Brexit vote until October 2016.
For GBP/AUD, 1.60 appears to be an area where the pair has found support in recent history. Between October 2016 and 2017, the pair has traded in a channel between 1.60 and 1.80. In 2017, both currencies have been strengthening broadly. The pound is higher thanks to optimism regarding the Brexit negotiation process. At times, we have written that optimism surrounding the pound (and for a good trade deal) have run ahead of expectations. Looking at the Australian dollar, the currency is strengthening as emerging market growth and commodity prices keep rebounding. Despite the good performance in 2017, our view is that the Australian dollar is likely to weaken in the near future as China’s economy heads for a downturn.