Australian Economy Set to Take a Few Years to Recover

First Covid-19 Economic Update Due This Week, What Could Happen to AUD Exchange Rates?

The Australian Economy according to Deloitte Access Economics is not likely to see positive growth until 2021-2022. In 2019-2020 the economy shrunk by 0.1% and following the pandemic 2020-2021 is also forecast to show a contraction of around 0.4%. This would be the first time since the 1980’s recession that Australia could have negative growth two years in a row.

The main concern for economists surrounding Australia is how the jobs market will look in the coming months, this is of course not just an Australian problem either. There is also thought to be a real danger that inflation over the next few years will outstrip wage growth which will mean the population could start to feel the pinch. When this happens consumers stop spending money which in turn reduces the growth of the economy across the nation.

Over the next few years there is also going to be fewer migrants coming into work with a expected fall of around 80%. This is expected to have a knock-on effect for construction and development once again slowing the economy down. Whilst many of these factors don’t tend to have an immediate knock on effect to the value of the Australian dollar the lack of optimism surrounding interest rates does.

Thank Bank of Australia are not expecting a increase from the record low 0.25% for some time, however there is a element of hope that the central bank wont need to cut the rate below this point. Against Sterling the Australian dollar has been incredibly strong in recent weeks currently residing just below the 1.80 level where it spent most of last week, at this point in time there may not be much that will change that.

Brexit Talks Could Influence Sterling

Over the weekend there has been hints that a Brexit deal may be moving closer to us. It is unlikely that the full deal will be fully thrashed out until the end of the year, however the term “landing zone” being thrown about and this suggest the two sides are cobbling something together. UK fishing waters has been a sticking point in the talks along with how much influence the European court has over the UK. Both of which it appears there might be a path in place that the two sides can agree on.

From Sterling perspective any move away from a No Deal Brexit could be positive and may help the currency start to find some support. Much of the recent negativity for Sterling has been the reality that the UK could always leave with a No Deal. At the start of the year the GBP/EUR was all the way at 1.20 off the back of avoiding a hard Brexit at that point. When the EU is involved in negotiations so often everything is left to that last second and this has been proven countless times.

An early stage agreement is expected to be I place by Autumn as the UK and EU nations will need to all be happy with it. Unlike the Withdrawal Agreement Bill which Theresa May struggled to get through the Houses of Parliament Boris Johnson with his enormous majority is unlikely to face any difficulties. This should mean that once the Prime Minister has a deal that he is happy with it should be approved.

Arguably this means that in around a few months time Sterling could start to find some support against the Australian dollar and the climb back towards the 1.90 even up to the 2.00 level might not be too much of a stretch. The fact the currency pair has already been at the level in recent times suggests to me that once some of the uncertainty goes, Sterling is undervalued at the current levels.

If you’re looking to complete a Australian dollar sale then you’re presented with a good window of opportunity at the moment. Many of my clients will ask if the fall will continue and whilst there is always a chance that could happen, the fact the GBPAUD hasn’t fallen much beyond 1.79 then maybe the markets see this as fair value. Either way in the coming months circumstances will change and a Free Trade Deal is starting to look like a distinct possibility. At this point I haven’t seen any past behavior that Sterling would do worse if a deal was agreed so the signs do point toe Sterling strength against the Australian dollar before the end of the year, but you never know with currency markets.

Get in touch using the form below to discuss these factors in more detail, and how they are likely to keep impacting Australian dollar exchange rates in the coming months. I’ll be happy to respond personally.