Inflation & US/China trade war hurts AUD
The pound to Australian dollar exchange rate has lost ground of late which can be largely attributed to the lack of clarity surrounding Brexit. Australia has had it’s own troubles however. Inflation continues to be a problem down under and it is still some way behind the Reserve Bank of Australia’s (RBA) 2-3% target. The RBA cut rates earlier in the year to 1% in an attempt to combat inflation and there is the possibility of further rate cuts during 2019. If there is further indications from the RBA that a change in monetary policy could be on the cards AUD has the potential to suffer.
There is a heavy reliance on China purchasing Australia’s exports which could also be contributing to Australian dollar weakness. As the US impose increased tariffs on China, China’s growth has slowed which in turn has a knock on effect to the Australian economy. Investors are choosing to move away from riskier commodity based currencies in favour of save haven currencies such as the Swiss Franc or US Dollar. There was also a huge sell off of stocks at closing bell, the benchmark S&P/ASX200 index tumbled 162.20 points, or 2.44%, to 6,478.1.
Rate Cut from RBNZ hits AUD
We have seen gains over night for sterling following a rate cut by the Reserve Bank of New Zealand which was larger than expected, a cut to 1% from 1.5%. Australia’s close economic relationship with New Zealand means the large cut has an effect on the Aussie. I am not convinced the pound’s advance will continue.
High probability of a Brexit No Deal
Despite the problems in Australia, the pound still could face further losses. Boris Johnson continues to threaten no deal and stated last week he would be ‘turbocharging’ preparations to leave the EU without a deal in place. Boris is using the threat of a no deal as ammunition to gain a more favourable deal on Brexit. Basically speaking however, the higher the probability of a no deal the weaker you could expect the pound to become. Brussels stance remains unchanged again reiterating there will be no concessions to the current deal on the table. It is not in Brussels interest to let the UK leave with a decent deal, they do not want other members of the bloc to consider following suit.
The timeline is also a concern. The parliamentary recess concludes 3rd September leaving less than 8 weeks to get a deal in place, keep in mind Theresa May had two and a half years. According to Bet Fair there is a 57% chance of a general election, if you look at when previous elections have taken place the currency in question tends to considerably weaken. The British 2010 general election serves as testament to this.
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