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.
In our previous piece on pound sterling, we wrote that the currency was likely to weaken thanks to (1) slowing growth across Europe, (2) excessively bullish speculator sentiment and (3) Brexit-related woes. Thanks to the UK’s significant trading ties with the EU, we wrote that the pound was unlikely to escape a slowdown across the region. Furthermore, speculator positioning in the pound looked ex…
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…
In our last commentary on the Australian dollar, we wrote that the currency was an enticing short opportunity thanks to slowing Chinese growth and a bearish trend. Specifically, we recommended shorting AUD/USD as means to express a bearish view on the currency. Since that time, the pair has weakened (from 0.7560), and is trading around 0.7280 on August 13. Going forward, we see further...
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.
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.