-GBP/AUD nears abyss as gloves come amid Brexit endgame.
-Fall through 200-week average bodes ill as ‘no deal’ fears rise.
-GBP/AUD at 1.7500 but ‘no deal’ prompts slide as far as 1.53.
© Taras Vyshnya, Adobe Stock. Above file image, Prime Minister's Chief Negotiator David Frost host talks with chief negotiator for the European Union Michel Barnier inside No10 Downing Street. Picture by Andrew Parsons / No 10 Downing Street
- GBP/AUD spot rate at time of writing: 1.7516
- Bank transfer rate (indicative guide): 1.6897-1.7020
- FX specialist providers (indicative guide): 1.7227-1.7352
- More information on FX specialist rates here
The Pound-to-Australian Dollar exchange rate has fallen below a key long-term average and is nearing a technical abyss after the gloves came off in the Brexit negotiations, and the pair could go over the edge if an ongoing row between London and Brussels leads to an acrimonious Autumn break with the EU.
GBP/AUD has fallen beneath its 200-week moving-average and to its lowest level since the summer of 2019, the last time that Brexit jitters left a mark on the British currency, amid market concern over the new Internal Market Bill which in Northern Ireland Secretary Brandon Lewis' own words, will "breach international law," in order to provide "a legal safety net designed to protect our country against extreme or irrational interpretations" of the EU Withdrawal Agreement.
"A benign interpretation of the government’s strategy is that the Bill constitutes an attempt to safeguard the UK’s internal market,” says Sven Jari Stehn, chief Europe economist at Goldman Sachs, which previously warned “against using economic arguments" to predict the outcome of the negotiations. "A fatalistic interpretation is that the provisions within the Bill signal that Downing Street no longer believes an FTA is within reach."
The bill establishes a mechanism and precedent through which terms of the new EU treaty and its Northern Irish protocol can be overwritten, ‘clarified’ or disapplied. It's enraged Brussels as well as drawn condemnation from certain political figures and parts of the commentariat in Britain.
Brussel's interpretation of the Withdrawal Agreement’s terms alarmed London, and has set the stage for a domestic and international political clash that threatens to derail the trade talks with the EU. Trade talks need to wrap up in sufficient time for any agreement to be ratified before the December 31 end of the Brexit transition.
Foreign exchange strategists at NAB assume some form of ‘skinny’ trade deal will be struck, which if so will be suportive of Sterling. NAB forecast the Pound-to-Australian Dollar rate to be at 1.8181 by month-end and 1.8518 by year-end.
NAB's forecast profile for GBP/AUD is "fairly flat given the expectation of further AUD/USD gains," says Ray Attrill, head of FX strategy at NAB. "If we are wrong and the UK is set to revert to WTO trading rules with the EU from 1 Jan 2021 there is significant upside risk to our AUD/GBP forecasts."
Above: Pound-to-Australian Dollar rate shown at daily intervals with 200-day moving-average.
The EU has demanded the UK government drop or amend the bill and is threatening legal action and a trade war, which might be little more than a new name for a ‘no deal’ Brexit, but the bottom line is that Sterling will immediately have to pick up part of the tab if relations with Brussels turn more awry.
“GBP/USD remains heavy at around 1.2820. It has been a remarkable 5 US cent drop in the past seven days,” says Carol Kong, a strategist at Commonwealth Bank of Australia. “The risk of a no‑deal Brexit is becoming increasingly likely and remains a major weight on GBP.”
A breakdown in the relationship with the EU and acrimonious exit from the transition period, which has preserved all but a few features of membership until December 31, would not only require the two sides to trade under the most favoured nation tariff of the World Trade Organization.
It could also see Brussels proactively attempting to damage the UK economy through law and regulation changes designed to coerce European and other international financial firms into downscaling their presence in London.
EU attempts to undermine the City of London have so-far fallen flat but this doesn’t mean it won’t eventually succeed to some extent, and nor has it prevented Sterling from fretting about the trajectory of relations.
Above: Pound-to-Australian Dollar rate shown at weekly intervals with 200-week moving-average and Fibonacci retracements of post-referendum recovery. Pound Sterling has fall below the 200-week average three times in the last five years, with steep subsequent losses on two of those occasions.
"It looked like the markets no longer cared about Brexit! But that didn’t last and the pound has now weakened to $1.29 and €1.09," says Paul Dales, chief UK economist at Capital Economics. "Markets have woken up with a bang to the possibility that the Brexit transition period ends on 31st December without a deal. That could set back the UK’s economic recovery from the coronavirus recession and prompt the pound to weaken from $1.30 now to around $1.15."
All of the available indications suggest that if the government wants to continue on its current path, there’s little anybody could do to stop it. For a start it now has a much larger Parliamentary majority than it did before the 2019 election which should ensure opponents to the government's plans will be unable to frustrate it in Parliament.
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Goldman Sachs, UBS, Credit Suisse, JP Morgan give their views on the Dollar on a 'Blue Wave' outcome.
Most notably, the government is invoking parliamentary sovereignty, which is “the most important part” of the UK constitution and the Supreme Court in its judgement in R (Miller) v Secretary of State for Exiting the European Union.
When combined with a large 80 seat majority in the House of Commons, the obstacles that must be overcome for rebels, the opposition and the EU to stop the government could be insurmountable.
Many analysts suggest that GBP/USD, the main Sterling exchange rate, could fall to around 1.15 in response to a ‘no deal’ Brexit.
Above: Pound-to-Australian Dollar rate shown at monthly intervals with 200-month moving-average.
This, when combined with resilience in the Australian Dollar, would be enough to push the Pound-to-Australian Dollar rate over the edge of an abyss.
“The Bloomberg consensus points to AUD/USD at 0.72 at the end of the year. By contrast our forecast suggests scope for a move back towards 0.68 on a 3 month view,” says Jane Foley, a senior FX strategist at Rabobank. “Even though Australia managed a small current account surplus last year, the AUD’s links with commodities means that it is likely to remain sensitive to broad levels of risk appetite. If the global economic recovery stalls in Q4, commodity prices and the AUD are set to come under pressure.”
Foley has a bearish outlook for the Aussie that would limit Pound-to-Australian Dollar downside to 1.6911 in the event of a bad Brexit, although this is still far below Friday’s 1.75. GBP/AUD always closely reflects an amalgamation of prices in GBP/USD and AUD/USD.
But if the market is right about AUD/USD sitting at 0.72 come year-end, the Pound-to-Aussie rate would fall even further and as far as 1.5972. However, the GBP/AUD rate could yet move even lower than that still, if local firms like Commonwealth Bank of Australia are right with their more bullish forecasts.
Commonwealth Bank of Australia looks for AUD/USD to trade at 0.75 come year-end which, when combined with a GBP/USD that’s fallen to 1.15, would put the Pound-to-Australian Dollar rate down at 1.53 and its lowest since 2013.
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