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 currently flat against all major currencies except the Japanese yen and the euro. Yesterday, the pound moved slightly higher against the US dollar after moving into oversold territory earlier this week. Thanks to a broad rebound across all 'risk on' currencies, the pound benefited accordingly. Today's GBP/USD trading range remains 1.2660 - 1.2940.
July year-over-year retail sales growth numbers both smashed expectations and accelerated relative to the previous monthly figures. Thanks to weakening base effects (at this point last year, retail sales growth was both low and decelerating), recent retail sales numbers have been fairly strong. Other economic indicators, such as industrial and manufacturing production growth, have also accelerated in recent history. Unfortunately, the data had a limited impact on the currency.
Looking at the pound more broadly, yesterday's rebound was particularly weak. Other 'risk on' currencies such as the euro and the Australian dollar have fared far better against the US dollar in recent history. Our outlook on the British pound remains bearish.
GBP/USD is currently above 1.2710. EUR/GBP is up slightly, with the pair trading above 0.8950. The pound is down slightly against the Australian dollar and flat against the Canadian dollar. GBP/AUD is currently above 1.7490, while GBP/CAD is above 1.6710.
|August 14||Claimant Count Change JUL||6.2K||9K|
|August 14||Employment Change MAY||42K||137K|
|August 14||Average Earnings excl. Bonus JUN||2.7%||2.8%|
|August 14||Average Earnings incl. Bonus JUN||2.4%||2.5%|
|August 15||Core Inflation Rate YoY JUL||1.9%||1.9%|
|August 15||Retail Price Index YoY JUL||3.2%||3.4%|
|August 15||Inflation Rate YoY JUL||2.5%||2.4%|
|August 15||PPI Input YoY JUL||10.9%||10.3%|
|August 15||PPI Output YoY JUL||3.1%||3.3%|
|August 16||Retail Sales ex Fuel YoY JUL||3.7%||2.9%|
|August 16||Retail Sales YoY JUL||3.5%||2.9%|
The Australian dollar is currently strengthening against all major currencies except the euro. Yesterday, the aussie ended the day higher against the US dollar. Following the recent sell-off, the currency had moved into oversold territory (while the US dollar looked overbought). However, the Australian dollar's recent recovery has been fairly limited. Today's AUD/USD trading range is 0.720 - 0.7340.
Yesterday, the Australian dollar was the strongest major currency. Thanks to improving risk sentiment, emerging market currencies were stronger and commodity prices were higher. This provided a welcome boost to the aussie after a big selloff in recent history.
Looking at developments in China, Reuters reported that the People's Bank of China has banned banks in its free trade zones from certain lending activities in order to ease pressure on the yuan in offshore markets. The restrictions aim to prevent commercial banks from using some interbank accounts to deposit or lend yuan offshore, tightening offshore yuan liquidity and making it more expensive to short the currency. The move aims to support the Chinese yuan which has weakened against the US dollar for nine straight weeks. Because of Australia's significant trading relationship with China, the Australian dollar is heavily influenced by developments in China.
Turning to local news, in a speech today RBA Governor Philip Lowe talked down the Australian dollar. Lowe said that a lower further modest depreciation in the currency would be helpful to boost inflation and stimulate growth. A lower currency generally leads to higher prices of imports into the country, which puts upward pressure on inflation. It also makes exports out of the country cheaper, which helps to boost the economy. Our outlook for the Australian dollar remains bearish.
AUD/USD is up and trading just above 0.7280. EUR/AUD is flat and trading above 1.5660. GBP/AUD is down and trading above 1.7460. AUD/JPY is up slightly, and trading above 80.60.
|August 14||NAB Business Confidence JUL||7||6|
|August 15||Westpac Consumer Confidence Change AUG||-2.3%||3.9%|
|August 15||Westpac Consumer Confidence Index AUG||103.6||106.1|
|August 15||Wage Price Index YoY Q2||2.1%||2.1%|
|August 16||Employment Change JUL||-3.9K||58.3K|
|August 16||Participation Rate JUL||65.5%||65.6%|
|August 16||Unemployment Rate JUL||5.3%||5.4%|
|August 17||RBA Gov Lowe Speech|
|August 17||RBA Ellis Speech|
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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.