- GBP/AUD rallies to three-week high
- But too soon to call end to downtrend
- AUD suffers amidst stock market, China jitters
- Chinese recovery might disappoint warns analyst
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Pound Sterling appears set to record its first weekly gain against the Australian Dollar in a month thanks to a 1.10% gain in the GBP/AUD exchange rate that took it to a high of 1.8159, but it remains too soon to suggest that a base has been found and the multi-week run lower has come to an end.
Indeed, if we look back to April 06 - the week in which the GBP/AUD exchange rate turned lower from a multi-month rally - we note that Sterling has fallen in 10 of the 14 subsequent weeks with any advances being tepid.
The exchange rate therefore remains locked in a downtrend and we would suggest it is too soon to suggest that downtrend is over and a recovery in Sterling is imminent.
Nevertheless, the three-week highs attained on Friday should go some way in easing pressure on those looking to transaction out of Sterling and into the Aussie and it will prove to be of some comfort to note that the pair has moved to the top of a three-week sideways trend area.
If the pair can record a second weekly advance next week then we would be more confident in suggesting that a temporary base has been achieved.
It is too soon to suggest the Pound is finding some genuine fundamental strength with which to strong-arm the Pound-Australian Dollar exchange rate higher, indeed as we note here, Brexit trade negotiations are still an issue and only once some resolution is agreed between the EU and UK will markets be more comfortable in sustaining any Sterling advances.
"Sterling has been able to recover strongly recently on the back of a more positive economic outlook, but Brexit risks should limit further appreciation potential," says Thu Lan Nguyen, FX & EM Analyst at Commerzbank.
There have nevertheless been some signs and hints of positivity surrounding the talks that have come through of late and this has been enough to unwind some of the oversold conditions that appear to have beset the Pound over recent weeks.
The Australian Dollar side of the GBP/AUD exchange rate could however be more instructive as we note the Aussie currency has suffered in the wake of a sharp fall in global equity markets, which we would typically expect considering the Australian Dollar maintains a high positive correlation with stocks, particularly the U.S. S&P 500.
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Markets dipped on Thursday and the soft start to Friday looks to suggest further downside could be likely in the short-term.
"Markets have continued yesterday’s general risk-off theme overnight, USD/JPY breaking below 107 (106.95) for the first time in two weeks and AUD/USD down 30pts (0.6935)," says Adam Cole, Senior FX Strategist at RBC Capital Markets. "The US reported 59K new cases of COVID-19 and the nationwide fatality rate is now clearly trending up. The “Buy American” theme of Biden’s speech on economic policy last night to some extent echoed Trump’s “America first.” On the whole, the speech was seen as setting a moderate agenda. Biden suggested he would like to partially reverse Trump‘s corporate tax cuts, taking the main corporation tax rate back to 28%, but with no mention of the time frame on which this might happen."
Biden is easily the favourite to win the November poll and his stance on taxes is notable as it marks a departure from Trump's low-tax environment that proved to be a significant engine for U.S. equity market growth and it appears traders could starting to turn more cautious on stocks in anticipation of a Biden presidency.
Meanwhile, China remains a key concern for the Australian Dollar as it is China that is the single most important market for Australia's huge export base that consists of iron ore, coal and natural gas.
The Chinese economy has recovered from the slump it suffered at the start of the year - a period that was characterised by notable Aussie Dollar strength. The recovery has predictably pulled the Aussie Dollar higher but economist Hao Zhou at Commerzbank says "the recovery is likely to slow down considerably from here."
This view should come as a warning to Aussie Dollar bulls.
"This is because the marked deterioration in the labour market is putting the brakes on private consumption, and the high level of corporate debt is holding back investment. In addition, old problems such as the trade conflict with the USA will hamper economic growth in the long term," says Zhou.
Zhou says that while industry and the services sector in the Chinese economy have all recovered in impressive faction, there are considerable problems in the labour market, where the crisis has left deep scars.
"At first glance, the increase in the official unemployment rate appears to be limited; it has risen from around 5% to 6%," says Zhou. "However, the corona crisis appears to have created "shadow unemployment". This refers to employees who have not been laid off but who are currently not working and are not paid. According to official estimates, their share in urban employment was around 1.2% in May. This means that the actual unemployment rate is a good percentage point higher than the official figure."
According to Zhou he currently very high level of unemployment will adversely impact on private consumption and thus the entire economy in the coming quarters due to the enormous income losses that will result.
If this does come to pass, then we could well see the Australian Dollar give back some ground heading into year-end.
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