Australian Dollar Hits Fresh Highs Against a Beleagured Pound Sterling
The Pound to Australian Dollar exchange rate has plumbed its lowest levels since 2013 on Tuesday the 4th October and looks set to go even lower.
GBP/AUD is at 1.6697 at the time of writing, a new 2016 low and the worst exchange rate for those looking to buy AUD with GBP since 2013.
Fresh Australian Dollar strength comes as the Reserve Bank of Australia left interest rates unchanged at 1.5%, as expected on Tuesday 4th October, having already cut them twice this year.
The accompanying statement was broadly neutral and markets pared expectations of further easing.
With the prospect of further interest rate rises now less likely the Aussie Dollar has turned broadly higher.
Sterling meanwhile remains under notable pressure with currency traders reacting to confirmation by the UK’s Prime Minister May that Article 50 of the Lisbon Treaty will be triggered before the end of March 2017 which will begin a two-year negotiation process to leave the EU.
While clarity is welcomed, it appears that traders sold GBP against AUD on May’s tough stance on the nature of negotiations.
The Government appears keen to make control over EU immigration a red line in negotiations which will likely mean the UK loses access to the European single market.
The freedom of movement of people between members of the single market is a fundamental cornerstone of the agreement.
The imposition of tariffs on UK imports by Europe, and potential loss of financial passporting, would likely have a negative impact on economic growth over coming years.
Details on what the UK will aim for in negotiations remain thin.
May says it won't be a Swiss or Norwegian model (Norway has full single market access; Switzerland access for most industries) but claims, "I want to give British companies the maximum opportunity to trade in and operate in the single market".
"The more limited the access to the single market, the worse for GBP," says Elsa Lignos at RBC Capital Markets.
The Government also said it would introduce a Great Repeal Bill which would remove the 1972 European Communities Act and convert all existing EU legislation into UK law on the day of departure from the bloc.
The short-term downtrend in GBP/AUD which began after the exchange rate posted the September highs is extending:
GBP/AUD will now probably reach the 1.6700 August lows, with a break below the 1.6749 lows probably confirming such a continuation.
The MACD momentum indicator is below the zero-line adding supporting evidence of more downside.
Strong support at 1.6589, however, is likely to limit the bear decline, but a clear break below it, confirmed by a move below 1.6500 would probably lead to the possibility of an extension down to support at 1.6250.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0112▼ -0.24%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9428 - 1.9509 |
**Independent Specialist | 1.9831 - 1.9911 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Australian Dollar Remains Supported by RBA
The Australian Dollar appreciated on the back of a recent speech from the new governor of the Reserve Bank of Australia (RBA), Philip Lowe, who told parliament - contrary to prevailing expectations - that no more interest rate cuts would be forthcoming.
This followed similar hawkish commentary from Deputy Governor Kent.
Their reluctance to endorse a further interest rate cut was underpinned by a more positive outlook for the economy, especially for mining investment, commodity prices and the labour market.
Australia’s base interest rate is 1.5%, the second highest in the G10, and this attracts a lot of flows from investors seeking yield, especially in the current low-yield global environment.
This is supportive of the Aussie dollar against the pound as the pound only has a 0.25% base interest rate which does not provide an equally attractive return profile for investors.
It looks highly unlikely the RBA will cut Australian interest rates at this Tuesday’s policy meeting, a move which could weaken AUD.
This contrasts with a more likely rate cut from the Bank of England due to Brexit concerns, and this dichotomy indicates further downside potential for the GBP/AUD pair in the coming five days.
Whilst the UK economy is surprisingly robust, no-one knows what the reaction to triggering of Article 50 will be, and the cost to the economy.
Recent reports from the government and leading politicians in the negotiation process suggest their stance on immigration is hardening and given the EU are unlikely to soften their stance on freedom of movement, it looks like a trade deal may be difficult to agree – which will be negative for sterling.
As far as hard data goes in the coming week, the main highlight for the pair will probably be the RBA rate meeting on Tuesday, October 4 and Retail Sales on Wednesday, October 5.
