US – China Trade War and and fall in Turkish Lira hurt AUD (Daniel Johnson)

GBP/AUD – Sterling has strengthened against the Australian Dollar of late. There are two main contributing factors. The ongoing trade war between the US and China and the fall in value of the Turkish Lira.

Australia is heavily reliant on China purchasing it’s goods and services, particularly raw materials. The trade war between the US and China will hit Chinese growth and in turn the Australian economy. If the situation escalates further this could cause more losses for the Aussie.

The situation in Turkey is also causing investors concern. The rapid rise in inflation and the lack of change in monetary policy to counter inflation is causing investor to move away from riskier, commodity based currencies in search of safe haven investments. If you are moving to currency, the US Dollar is the destination of choice. Turkish President, Erdogen has put his protege and son-in-law, Berat Albayrak in charge of the economy and it looks as though there will be little chance of a change in interest rates.

The worry is caused by the amount of foreign debt, the majority of it due to be paid in US Dollars. With the US Dollar strengthening significantly of late and the sharp drop in Turkish Lira the debts are now much more expensive. This is why we have seen investors move away from the Aussie.

There has been some good news, Trump has made it public that he thinks rates should be kept on hold to protect US exports from becoming to expensive. This is controversial as the Federal Reserve is meant to act as a separate entity to the government.

The US Dollar has lost some ground against the majority of major currencies as we have witnessed a slight increase in risk appetite.

It will be interesting to see if this will influence monetary policy. Fed Chair, Jerome Powell is due to speak at the Jackson Hole Symposium on Friday. He will no doubt be questioned about how many rate hikes are expected for the remainder of 2018.

I still feel there is no room for significant Sterling gains at present, while there is still the possibility of a Brexit “no deal” scenario I feel the Pound will be anchored at low levels.

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