Australian Dollar Slides Against Reflating Pound but Could Gain Long-Term on Commodity Price Pick-up
The GBP to AUD exchange rate has shot higher as foreign exchange markets start to take notice of the UK's rising bond yields. However, we also note that longer-term the Aussie could be a winner of a Trump presidency.
Pound Sterling is one of the winners in the post-US election world and is up against most of its G10 peers, including the Australian dollar with the Pound to Australian Dollar pair quoted at 1.6471 at the time of writing.
The best levels reached since the election was recorded at 1.6611 and with the pair making another attempt at these highs we would have to call near-term momentum as being favourable for the Pound.
There is an incredible surge being conducted by the Pound, particularly against the commodity currencies as markets suddenly refocus their attention to dynamics in global bond markets.
For some time now Sterling has been undervalued on the metric of bond yield differentials - i.e the difference between UK yields and global yields.
UK yields have been rising for months now, yet Sterling has not followed them higher. The ascent of Trump has however seen markets suddenly pay attention to a yawning undervaluation.
Bond market focus comes as investors believe Trump's promised economic stimulus will bring about inflation over coming years, and the premium for owning government debt has therefore risen accordingly.
This in turn pulls currencies higher.
So what we are seeing is the Pound advancing on the Australian Dollar as markets see the yield differential between Australia and the UK close.
Currencies like the Australian and New Zealand Dollars are in fact most at risk of this new theme as funds are tipped to start flowing back to developed nations that have endured low interest rates since the 2008 financial crisis.
Trump really is a gamechanger.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.0109▼ -0.26%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9425 - 1.9506 |
**Independent Specialist | 1.9828 - 1.9908 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Australian Dollar Outlook Brightens as Commodity Prices Gain on Trump Policy
The Aussie Dollar nevertheless looks handy and was seen outperforming its other G10 peers as industrial metals prices took off with iron ore and copper prices accelerating.
Iron ore is Australia’s premier export accounting for 20.2% of the country’s export basket.
Spot iron ore leapt 5% to a $US70.98 a tonne, the highest since January 2015.
Dalian iron ore futures surged another 7% on Thursday November 10th as commodity markets extended their rally as markets consider the campaign promises made by US President-elect Donald Trump to carry out broad spending to improve US infrastructure and create jobs.
Base metals gains are suggested to be led by Trump plans to spend more than $500bn on infrastructure projects including roads, schools. airports and bridges.
“The Trump victory is seen as good for US infrastructure development following pledges for new roads and bridges. Iron ore prices were already having a good run due to strong demand for steel in China and in Asian markets,” says John Meyer at SP Angel, a brokerage in London.
Another key Australian export, gold, saw prices trading higher by 1.1%, or $14/oz, after the c.$60/oz intraday jump the previous session has been completely undone by the end of Wednesday.
As long as the rally in base metals continue we would expect the Australian Dollar to benefit.
"The Republican sweep looks to increase the chances of fiscal stimulus especially on US infrastructure, which should support the base metals and we are cautiously optimistic that this may be the predominant driver in the coming quarters," says Michael Widmer at Bank of America Merrill Lynch Global Research.
However, SP Angel’s Meyer warns that iron ore prices may now be seen at unsustainably high prices.
Therefore we would expect some paring of gains if Meyer is correct.
