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.
Pound sterling is moving up today against all major currencies except the euro and the Australian dollar. Yesterday, the pound reversed course after the Bank of England's chief economist unexpectedly signaled his support for a rate hike. The British pound/US dollar pair found buyers just below the low end of yesterday's daily trading range (1.310). Today's GBP/USD trading range is 1.310 - 1.3470. After moving up for the last two trading sessions, the pound is no longer looking oversold.
Looking at the Bank of England's decision more closely, the BoE held rates at 0.50% yesterday and maintained its existing policies (including quantitative easing). The big change was that BoE Chief Economist Haldane is now supportive of another rate hike. Beyond Haldane's change of heart, the institution also stated that household spending and business sentiment have improved markedly. Members of the BoE are also more confident that the slowdown seen in the first quarter is temporary. All in all, Haldane's change of stance and the BoE's upbeat statement suggest a higher likelihood of a future rate hike. Unsurprisingly, the pound rallied from oversold conditions and continues to make gains today. Looking at trading patterns, yesterday's move up was accompanied by significant trading volumes, a bullish signal in the short-term.
While positive news is helping the pound recover, the longer-term outlook for the currency is not particularly benign. Thanks to an ongoing deceleration in European growth, expect the pound to remain in a bearish trend for the foreseeable future. Those looking to short the currency may consider entering the trade towards the top-end of our daily trading range. Our outlook on the pound remains bearish.
GBP/USD is currently above 1.330. EUR/GBP is up slightly, with the exchange rate above 0.8760. The pound is down slightly against the Australian dollar and up against the Canadian dollar. GBP/AUD is currently above 1.7910, while GBP/CAD is above 1.7670. GBP/JPY is up, and currently trading above 146.60.
|June 18||Rightmove House Price Index YoY JUN||1.6%||1.1%|
|June 21||Public Sector Net Borrowing MAY||-£3.36b||-£5.27b|
|June 21||BoE Interest Rate Decision||0.5%||0.5%|
|June 21||BoE Quantitative Easing||£435b||£435b|
|June 21||BoE MPC Vote Hike||3/9||2/9|
|June 21||BoE MPC Vote Cut||0/9||0/9|
|June 21||BoE MPC Vote Unchanged||6/9||7/9|
|June 21||BoE Gov Carney Speech|
|June 22||BoE Quarterly Bulletin|
The Australian dollar is currently mixed. The Aussie is flat against the US dollar, while strengthening against the Japanese yen, euro and the British pound. Yesterday, the currency strengthened against the US dollar at the outset of the day, but ended the day lower. Today's AUD/USD trading range is 0.7350 - 0.7510. The pair is currently trading just above the low end of our indicated trading range.
Chinese equity markets have resumed selling off after yesterday's rebound. Both the Shanghai Composite and Hong Kong's Hang Seng Index are currently weaker. The Chinese offshore yuan (CNH) is also down sharply, with USD/CNH currently trading above 6.50. Given Australia's significant trading relationship with China, the currency tends to closely track developments in Chinese financial markets. Thanks to an ongoing deceleration in growth across emerging markets, the Australian dollar remains under pressure.
Looking at developments from Australia, RBA Governor Philip Lowe said that global inflation may be set to remain low for extended periods of time. Lowe also highlighted the unknown risks associated with prolonged quantitative easing. Recent communications from the RBA suggest that the Bank remains firmly in neutral.
In politics, Prime Minister Turnbull has claimed a major victory after passing income tax cuts through Australia's Senate. The news had a limited impact on the currency as the Australian dollar remains weighed down by concerns regarding the future outlook. Our outlook on the Australian dollar remains bearish.
AUD/USD is down slightly and trading just above 0.7350. EUR/AUD is down and trading above 1.5680. GBP/AUD is down slightly and trading above 1.7830. AUD/JPY is up slightly, and trading above 81.20.
|June 19||House Price Index YoY Q1||2%||5.0%|
|June 19||RBA Meeting Minutes|
|June 20||RBA Gov Lowe Speech|
|June 21||Westpac Leading Index MoM MAY||0.2%|
|June 21||RBA Bulletin|
In our previous analysis on the pound, we claimed that the number of catalysts driving the currency’s bullish trend were running out. At the time, we warned that the rally was running out of momentum, but did not see any evidence that would suggest adopting a bearish stance. Following recent weakness in the British pound, we downgraded our longer-term outlook on the currency to bearish on April 2…
The outlook for the pound, while still bullish, is looking less optimistic today. More specifically, factors including the ongoing slowdown in regional growth, lower expectations for a May rate hike, and significant speculator interest in the currency are hampering the rally. Following Brexit, the trade-weighted value of pound sterling (a measure of GBP relative to other currencies) hit an all-t…
Looking at the British pound today, concerns regarding Brexit and the stock market rout are outweighing the Bank of England’s positive economic outlook. As a currency that benefits from rising risk appetite, pound sterling has been selling off sharply in February thanks to fears regarding elevated asset prices. While Bank of England Governor Mark Carney helped the pound last Thursday after saying…
In our previous take on the Australian dollar in late February, we wrote that falling commodity prices, an ongoing slowdown in China, and weak domestic conditions (looking at both economic data and monetary policy expectations) were significant headwinds for the currency. Beyond economic indicators, quantitative signals also suggested that the bullish trend was running out of steam. We downgraded…
We take a closer look at the Australian dollar forecast, and how domestic and international economic changes are set to impact the currency. From China's slow down to key domestic indicators that reveal slowing growth, we break down why we're changing our outlook on this commodity currency.
For a currency that strengthens when global growth accelerates, recent moves in the Australian dollar have been fairly disappointing. While the currency rocketed higher between mid-December and late January, the Australian dollar has sold off sharply in recent weeks. The currency first began weakening against the Japanese yen, which led us to downgrade our short-term AUD/JPY outlook to neutral on…
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.