Australian Dollar's Outlook is Bright say HSBC, Cite China and Understated Domestic Factors

- Global growth jitters dismissed as secular Asian EM growth story

- Rise of Aussie services sector "understated"

- Pound vs. Aussie Dollar Could be Entering Longer-Term Downtrend

Image in the public domain

Above: HSBC headquarters, Lonond. Image in the public domain.

"The Surf's up," says Paul Bloxham, chief economist for Australia and New Zealand at HSBC, adding "we are riding a global growth wave."

Bloxham is referring to recent Australian GDP growth data which shot up by 3.1% in Q1, the largest increase in 6 years, and explains why it is he believes the outlook for the Australian economy and its currency is bright.

"We saw a pick up in growth of 3.1%, supported by a lift in business investment, by a consumer which looks in better shape than many commentators have said, and of course by net exports which is the key link Australia has with the rest of the world," says Bloxham.

Increasing protectionism and fears of global trade wars are not a major concern for the Australian economy which is in a perfect partnership with China, which is not in major peril either from trade or domestic factors.

A key factor which has helped the Australian economy is China's "supply-side policy" which has involved Beijing "cutting back on the domestic production of low-grade materials," says the HSBC economist. This includes the production of steel from low-grade iron ore with the result that Australia has benefited because it only exports higher grade ore. The policy has helped lift "prices of iron ore and coal, which has helped Australia along," says Bloxham in an interview with Bloomberg.

Another key factor is the rising services side of the Australian economy, which Bloxham describes as an "understated" factor in the whole Aussie growth equation.

The bulk of the Australian economy is now services, not mining.

Australia's diminishing reliance on commodity exports and the "fixed-asset investment cycle" and its increased prosperity is more as a result of selling services, specifically tourism and education services to China and the rest of Asia's growing and increasingly more prosperous middle classes.  

This trend is unlikely to abate any time soon or be impacted by macro trade war themes and so the outlook remains positive for the Australian economy.

What's good for the Aussie economy, especially its exports is almost certainly good for the Australian Dollar given an increase in demand for

Australian goods and services abroad increases demand for the currency, and we can infer that Bloxham's thesis is also bullish for the Australian Dollar.

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GBP/AUD: More Potential Downside

The Aussie, in fact, rose steeply after the release of the strong Q1 growth data earlier this week, and looks set to continue, especially versus the Pound, according to a view of GBP/AUD chart by Mathew Simpson, an analyst at Farraday Research.

Simpson sees strong long-term bearish signs in the Pound-to-Australian Dollar exchange rate, supporting an extension in the current short-term downtrend.

The monthly chart is signalling the potential for more downside and supporting the steep declines seen on the daily charts.

Recently the pair broke below a major trendline and is likely to continue moving lower - if not in the very short-term then probably longer-term - says Simpson.

AUD graph

Currently, the exchange rate is "venturing into oversold territory," but assuming it undergoes a "low volatility retracement or some other form a compression at these lows" he would consider opening a bearish bet in line with the dominant downtrend.

Australian Dollar graph

The 1.75-76 price level may even act as a resistance and rotation level for any pull-backs, and result in a resumption in the downtrend for the pair.
The trendline break and strong momentum lower, however, are not the only rationale for Farraday's bearish stance.

"If we go down to the monthly time frame, we did indeed get that bearish reversal pattern which closed below the trendline," says Simpson.

The bearish reversal pattern he is referring to is the three-month' evening star' reversal pattern (circled below) in which the price peaked and then fell, breaking through a major trendline in the process.

AUD graphs monthly

This suggests the rally over the last two years has been nothing more than a correction of the more dominant longer-term downtrend, and this correction may well have just ended with the monthly reversal at the March highs.

Due to the bearish momentum on higher timeframes, Faraday's Simpson sees the potential for a continuation lower to 1.7350 followed by the 1.70 lows.

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