Increase in Risk Appetite Helps Support the Australian Dollar

AUD GBP Erases Earlier Losses to Point Higher

With parts of the world getting their economies back up and running due to a lessening of lockdown measures we have seen an increase in risk appetite amongst investors. The safe haven of the Swiss franc and the US dollar are now being left behind and money is being moved into riskier currencies. The Australian dollar being a destination of choice. The impact of the Coronavirus was light in comparison to other countries and is becoming a more popular destination for investors capital. As the stock markets have rallied this has caused the change in sentiment.

Australia has close ties with China, China’s economy can have an impact on the Australian economy and in turn the Australian dollar. There has been positive data from China of late showing the economy is getting back to its feet giving the Australian economy a boost at the same time. There was some poor data out over the weekend however with trade balance data coming in worse than expected.

Chinese Trade Balance Could Be a Cause for Concern

The trade balance climbed to $62.93 billion, which is a current record which was driven by a collapse in imports by 16.70% in May. Although exports fell by less than expected at 3.30%, as international demand suffered further due to COVID-19 shrinkage, the imports were the real concern. Either the China domestic recovery is slower than expected, or China’s purchasing managers are anticipating a lesser demand for Chinese exports going forward. Either way one cuts it, the import drop will be worrying to regional Asia and commodity exporters such as Australia.

Sterling Remains Fragile With No Clarity in Brexit Talks

Sterling is in a very fragile position and investors should be cautious of hanging on for significant gains short term. The pandemic has had a huge impact in the UK and to add to the pound’s woes we also have Brexit to contend with.

Boris has until the end of the month to request an extension in trade negotiations and the PM is adamant there will be no extension past 2020. There are still major points of contention however, the Irish border situation is still yet to be resolved and there is still an impasse on fisheries. Johnson is playing a dangerous game, to get a deal through in a limited period of time during a pandemic is a tall order and the chances of a no deal scenario are real. There have already been warnings over the last week from the Bank of England that small business’ should prepare for the event of a no deal.

A no deal scenario is the investors worst fear with some economist predicting a huge fall in sterling value should the country be faced with leaving the EU with no trade deal in place. To some extent a no deal scenario has already been priced in to the value of sterling. Let us not forget only shortly before the referendum was announced GBP/AUD was above 2.20. We now sit in the 1.82s.

Sterling will remain fragile until we have some sort of clarity on Brexit. From current reports however it looks as though a deal is still a long way off. It is important to remember Theresa May had several years to get a deal through with many branding her negotiation skills and her stance as weak. Could it be the case that Brussels that are simply not prepared to make significant enough concessions on key areas of contention?

Boris may find out the hard way that Barnier is not willing to play ball. There also must be some sort of deterrent to other EU members following suit. They do not want to make it look easy to leave the bloc with a favourable package otherwise other members of the EU could decide to hold their own referendums. Italy is one member who has been open with criticism regarding EU funding.

UK GDP is released on Friday and does have the potential to cause market movement although it is still very difficult to judge the impact the Coronavirus has had on the economy.

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