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Pound to Australian Dollar Little Changed After Minutes From Reserve Bank of Australian Meeting

The GBP/AUD was little changed following the release of the minutes of the latest RBA meeting. 

The report of the meeting showed the Reserve Bank (RBA) unlikely to cut interest rates or hike them in the foreseeable future.

At 1.5%, the central bank's base lending rate is already at a record low for the country. 

The relatively low interest rate has also encouraged consumers to borrow more, raising concerns amongst RBA officials, that they are taking on unsustainable levels of debt.

Low interest rates mean cheap mortgages which has led to increased mortgage borrowing and an overheating property market.

Balanced against this are poor levels of full-time employment. 

In the minutes the RBA noted taht although unemployment had gone down in 2016 this was mostly due to people taking on more part-time jobs.

With the economy still struggling on the one hand and yet heightened risks from over-borrowing, the RBA cannot cure both problems at once.

The former requires lower interest rates whilst the latter requires higher rates.

It is not surprising therefore that it decided not to change rates at all.

Analysts at Capaital Economics see no chance of the RBA hiking rates in 2017 and perhaps not even in 2018.

Given the bank's concerns about stretched "household balance sheets" there seems little chance of a cut either.

Technical Forecast

The GBP/AUD pair has resumed its short-term uptrend after a correction.

We are cautiously constructive for the exchange rate, expecting a continuation higher.

A break above the 1.7178 highs would reconfirm a continuation of the short-term uptrend.

The next target is 1.7320, at the R1 monthly pivot, a level traders watch as it often acts as an obstacle to price.

The one cautionary sign is the MACD momentum indicator, which looks like it might be topping out and therefore about to fall, however, it is too early to say for sure.

GBPAUDDec18

Backflows to the USD

The Australian Dollar fell last week due to backflows to the more popular US Dollar.

The Aussie appears to be giving back some of the gains it made when US interest rates were at record lows and no rate hikes were on radar with any certainty.

Now that the Fed has raised interest rates and expects three more 0.25% hikes in 2017, that will bring US interest rates back up to 1.5% which is what the Australian interest rate is currently.

Without an advantage over holding the more liquid Dollar, investors are already ditching the Aussie quicker than you can say 1,2,3.

There also seem to be signs the Aussie economy is slowing despite strong employment data.

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“Fundamentally, there are some sharp divergences becoming apparent between the US and Australian economies.

“It would appear that just when the US recovery appears to be picking up some momentum that Australia risks entering a technical recession.

“Although most analysts seem to suggest that the recent uptick in commodity prices will help them to avoid that moniker we are still facing a period of lacklustre growth and divergent monetary policies,” said Blackwell’s Steven Knight.

The backflows to the USD appear to be weakening the Aussie across the board not just in the AUD/USD pair as witnessed by recent weakness against other currencies such as the Pound.

The Pound was marginally supported by its central bank adopting a more ‘neutral’ stance last week, and thus held its own versus AUD.

Iron Ore Recovering

Iron Ore prices stuttered but have recovered after a brief pull-back and are now close to the recent two-year highs at $82.80/tonne.

This should support the Aussie as Iron Ore is the country's biggest export.

Continued robust demand from China seems to be at the root of the appreciation, however, analysts from Investment Bank Macquarie see the rise as disconnected from the commodity's fundamental value which should be lower.

“Iron ore prices have remained disconnected to the fundamentals in our view since late October, ranging from $US60-83 a tonne despite clearly abundant supply of iron units (albeit shortages of some higher grade material),” the investment bank said.

“We have updated our demand numbers, reflecting the recent strength in Chinese demand and a stronger ex-China view.

“However, we still believe iron ore supply remains abundant with prices above $US60 a tonne, and with Chinese mine costs lower in US dollar terms given recent RMB depreciation, we do not see a return of cost inflation in iron ore mining which justifies prices anywhere near current levels," said analysts at Macquarie.

Data in the Next Five Days

The main release for the Pound in the coming week is third-quarter GDP on Friday, December 23, which is forecast to show a 2.3% rise year-on-year and a 0.5% rise quarter-on-quarter in Q3.

For the Australian Dollar, it is a quiet week with the main release coming in the form of the RBA minutes due for release on the evening of Tuesday, December 20.

 

 

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