GBP/AUD – GBP/AUD currently remains range bound between 1.75-1.80. The outlook for both currencies is not necessarily the best. The Australian Dollar will find it hard to find a momentum due to the ongoing trade war between China and the US. Australia has a heavy reliance on China purchasing it’s exports, particularly iron ore. The tariffs imposed by the Trump administration are quite severe and with China threatening to match US tariffs Dollar for Dollar this will hit both economies hard and in turn the Australian Dollar.
During times of global economic uncertainty investors tend to avoid commodity based currencies in favour of safe haven currencies. Despite the US initiating the trade war, the US Dollar is proving to be the destination of choice. 10yr treasury bonds currently offer the best returns seen in years and the Federal Reserve have the intention to hike interest rates a further two times by the end of the year.
I feel the trade war with China could be sustained despite the US holding the majority of the cards.
From the UK side, Brexit negotiations will be key the the value of Sterling. Theresa May’s Brexit proposal has taken criticism as it goes against how Brexit was sold to the public.
The proposal includes a free trade deal for goods and agricultural products. This would essentially keep the UK’s rules and regulations aligned with those of the EU. This would allow trade in goods to flow freely and the Irish border would remain open.
The proposal for services however will be different. The UK would like to take back control of services, particularly the financial sector. Services make up 80% of UK GDP. This would result in more barriers for companies’ trading aboard.
The risk of course is that financial services will move abroad. This is a serious concern as the tax income from the financial sector is huge. May intends to reform the existing equivalence regulation where temporary customs union access is granted, but can be removed at anytime. This situation does not fill me with confidence.
Merkel has apparently agreed to a deal behind closed doors.
If the trade war escalates then we could see GBP/AUD breech 1.80 although I do think this would be a long shot. aim to trade in the 1.79s if you have an Australian Dollar requirement.
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