Despite numerous reports yesterday that there has finally been a breakthrough in Brexit talks, the pound somewhat surprisingly failed to make any significant inroads against the AUD.
The GBP/AUD pairing was trading at around 1.80 for much of Thursday, a level which is likely to provide AUD with an element of protection, having seen its value soar over recent days. Looking at the recent trend, those clients holding GBP will have been left disappointed, with the AUD gaining over 5 cents in the past week.
To put this into monetary terms, any client selling AUD $200,000 to buy GBP today compared to this time last week, coud have gained an additional £3,000.
|Currency Pair||% Change in 1 month||Difference on £200,000|
Reports that UK PM Theresa May has struck a deal with Brussels that will give the UK’s financial sector continued access to the single market were taken positively by investors. The obvious question for those with an upcoming GBP/AUD currency exchange to execute is why this did not correlate to an increase in value for the pound against the AUD?
This can be partly attributed to comments made about the US-China trade war by US President Donald Trump, who said “I can make a deal right now, I just say they’re not ready." The AUD’s value is inextricably linked to the expanding Chinese economy, due to the strong trade relationship between the two countries. Therefore, any thawing of the current trade standoff between the US and China is likely to help boost confidence in AUD, which in turn should help to increase its value.
In addition, due to the fact it is a commodity based currency, the AUD relies on a healthy global economy to prosper.
If the US and China can find some common ground over the coming weeks, this should help to boost global trade, which has slowed of late and was one of the reasons AUD was struggling to gain any significant value against the pound until only recently.
As a general rule, when global investor confidence starts to grow their risk appetite increases. Funds are then moved into riskier based assets like the AUD, which will drive its value up as a result.
Despite its recent improvement, AUD could still face difficulties longer-term. Until a breakthrough is actually made, the current US tariffs on Chinese imports are likely to put pressure on the Chinese economy. This is evidenced by the fact that Chinese industrial firms have now shown a contraction for five consecutive months.
The Reserve Bank of Australia (RBA) is also unlikely to raise interest rates anytime soon. It may be prudent for those clients selling AUD to take advantage of the current spike and remove any risk of a retraction to last month’s previous lows.
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