The pound to Australian dollar has shifted higher this morning and remains comfortably above 1.80 although this is now a long way off those highs seen two months ago when rates were sitting comfortably above 2 for the GBP vs AUD pair. The Australian dollar continues to show incredible resilience having rallied 27% against the US dollar since March after it hit an 18 year low. The reason for the Australian dollar strength is down to the sharp improvement in risk appetite. The Australian dollar continues to be well supported as the general outlook for the global economy has to date improved considerably since lockdown measures were introduced for most countries in March. Now that governments globally have poured vast sums of money into their economies to beat the Coronavirus and keep business open, the Australian dollar has been a clear beneficiary.
Those looking to sell Australian dollars would be wise to make contact and consider taking advantage of the recent sudden spike which has built up over these last two months. There is still a huge degree of uncertainty surrounding COVID-19 and whether a second wave of infection will be seen in the Autumn. Should the global outlook suddenly deteriorate due to Coronavirus then the Australian dollar could be hit hard once again. For the time being businesses are reopening and employees ate slowly getting back to work but there are real concerns that the reproduction rate in numerous countries could push higher above 1. In the UK for example both the South West and North West are particular hot spots of infection with the R rate possibly even above 1.
The Reserve Bank of Australia which is renowned for a little jawboning (talking down a currency) even refrained last the last meeting which has helped support the Australian dollar further. In fact the Reserve Bank of Australia (RBA) has signalled a complete dislike to negative interest rates which has been applied, with relative success, by other central banks. Even the Bank of England has considered negative interest rates as a serious contender to further stimulate the UK economy. For the time being though this is a non-starter for the RBA and by making this clear helps support the dollar whilst other central banks apply negative interest rates or consider doing so. The US Federal Reserve meet tomorrow and any changes or further guidance could see a shift not just for the US dollar but also the Australian dollar.
Home loans for April are released on Wednesday and may give some indication as the health of the Australian property market. Whilst global investor confidence has improved dramatically the Australian dollar does still depend on a buoyant economy. The Australian housing market has show signs of weakness with prices which are perceived as too high. Any downturn in the economic indicators could see weakness in the Aussie. There are reportedly some trade tensions between Australia and China which could give the Australian dollar a headache if there is any escalation. The Huawei situation is also politically explosive, and Australia has ruled out further dealings with the Chinese company. Australia is not alone in scrutinising Huawei but when China is a major importer of Australian both goods and commodities the risk for fallout is high for the Australian economy.
Brexit – GBP vs AUD
The Brexit trade negotiations produced no further progress as the fourth round of discussions came to an end on Friday. The EU’s chief negotiator Michel Barnier stated that there had been “no significant areas of progress”. However, there is some optimism that both the UK and EU could be prepared to compromise. The Financial Times cited state aid as one area the EU may be able to compromise on. The UK as a sovereign state after Brexit wished to exercise control in this way and not be ruled by Brussels. The EU argue that to have access to its major markets the UK must play by EU rules. The debate continues after almost four years since the 2016 EU referendum. Expect political fireworks 18th June at the EU summit when it will be decided whether or not there will be any extension to the transition period which ends 31st December 2020.
The UK is expected to announce a further easing of lockdown measures this week to include allowing pubs and cafes to reopen if there is outdoor seating available. Considering how much the pound reacted on the back of the governments initial plans to keep businesses afloat and the successful furlough scheme any big developments could help lift the pound higher. There is also speculation the British government may limit the social distancing 2 metre rule to just 1 metre which could allow businesses to boost activity further. The strategy has been tried elsewhere and has helped the Danish and Dutch economies bounce back quickly. Uncertainty still remains over whether the recession in the UK will be quick V shaped recession or the longer more protracted U shape.
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