When China sneezes, the Australian economy tends to catch a cold. Will a slowdown in China weaken the Australian Dollar?
The AUD has lost value of late, with Sterling gaining over five cents in recent weeks. The Pound touched 1.70 against the AUD last week, before retracting below what has now become a key resistance level on the pair. As mentioned earlier in my report I still feel that investor confidence in the UK economy is not yet high enough for the Pound to breach this level sustainable but the question most clients have been asking me is why the AUD has lost value, when economic data coming out of Australia has been fairly positive of late.
Whilst last week’s surprising political U-turn by Theresa May has had an effect, possibly due to the fact investors have priced in the expected outcome and at least another four years of the same government and alongside it an element of stability, there are other factors to consider.
China as regular readers will know is Australia’s closet ally in terms of trade and despite its ‘cloak & dagger’ style economy, which releases only limited information, there has been a recent slowdown in its imports of Australia’s vast supply of raw materials. With Australia’s mining industry amongst the highest in global labour costs, any slowdown in its exports can have an instant detrimental effect on their economy and ultimately the AUD.
Whilst these figures will fluctuate the recent downturn could be another reason the AUD has lost value of late.
Despite its recent decline, those clients holding Sterling may wish to take advantage of the current spike, especially when you consider reports this week from the IMF, who indicate that the global economy is actually gaining momentum, news which is positive for commodity based currencies like the AUD.
Whilst even medium-term outlooks should be taken with a word of caution, particularly in the current market, any advances for global trade could help the AUD realign its recent losses and any clients looking to buy AUD could see the current market opportunities dissipate.
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