Sterling | Australian Dollar Quarterly Forecast Q4 October-December 2019

• Australia wants an end to the trade war
• The budget is back in the black – almost!
• Australia interest rates at historic low
• Brexit uncertainty still troubling the Pound

Introduction

In July 2019, the Pound languished against the Australian Dollar at 1.768 in typical mid-market rates. Fast forward to September 2019 and it hit a high of 1.847 thanks to hopes of a Brexit deal being reached. This pattern is typical of what has happened with other major sterling pairs, but the AUD graph has a little more ups and downs on the way, as the Australian Dollar has clawed back some of the gains, before losing them again. It’s also true that while the Pound has strengthened, it has been limited so far to just a four-month high, whereas it has made annual or multi-year advances against other currencies.

Where GBPAUD will end up by the end of Quarter Four will largely depend on whether UK Prime Minster Boris Johnson can make a deal with Europe before the 31st October leaving date and how the US-China trade talks affect the Australian economy. Think of this, in our next quarterly report, Brexit could be behind the UK – although the Pound may still be affected by the economic fallout. Those exchanging sterling or Aussie Dollars should obtain guidance from their Halo Financial currency consultant and closely watch the news and FX markets.

Australia wants an end to the trade war

Australia wants an end to the trade war – and it is not alone! Governments and Central Banks around the world have been warning of the damage the US-China trade war is doing to their economies. Australia has more to lose – or gain – than most. New figures show China receives a record 40% of exports from Australia – a nearly 70-year high. Imports from China are also increasing and rose 15% in the last financial year. It’s little wonder than Australia joined other nations in calling for compromises to end the trade way.

In an article for the Australian Strategic Policy Institute, Treasurer Josh Frydenberg joins other ministers from Canada, Singapore and Indonesia in saying success comes from multilateralism. “By underwriting global economic and political security, the multilateral system allows both big and small countries to fulfil their potential. As beneficiaries of this system, we all have a responsibility to safeguard the institutions that have underpinned our economic prosperity. We must now work together to forge a consensus on pressing global challenges. Rising trade tensions are one such challenge. While we acknowledge that legitimate issues must be addressed, we worry that the risks of collateral damage are growing. Uncertainty over the global outlook is contributing to a slowdown in trade and manufacturing activity.”

They conclude, “All of us must play a role in restoring the multilateral system that has contributed so much to our shared growth and prosperity over the past 70 years. Our collective determination and wisdom can return the global economy to a more positive path. As senior ministers, we speak out to affirm that we will use all our energies to encourage cooperation on the global challenges we face together.” Running up to October’s planned trade talks there was sign of compromise. The Chinese showed goodwill by leaving out agricultural products in the latest round of tariff rises and Donald Trump followed suit by delaying a planned $250 billion of tariffs for a fortnight after the 1 October deadline. Treasury Secretary Steven Mnuchin has said Donald Trump wants “the right deal”. “The president’s been very clear: if we can get the right deal, he wants the deal. If we can’t get the right deal, he’s happy with the tariffs.” Any progress is likely to strengthen the Australian Dollar and any further delay will weaken it against the Pound.

The budget is back in the black – almost!

Figures can be interpreted to indicate almost anything. In the case of the Australian Budget Final Outcome for 2018-19, Treasurer Josh Frydenberg, announced that there was a $690million deficit in the budget, which is $13.8billion better than forecast However, as that represents under .01% of GDP, for all intents and purposes the budget is balanced for the first time in more than 10 years. Tax revenue from companies and individuals is $8.1billon stronger than expected. In addition, $6.4billion less than expected was spent on the National Disability Insurance Scheme, the DisabilityCare Australia Fund and family tax benefits. But a fall in household spending meant indirect taxation revenue, was nearly $5billion lower than estimates. At present it makes up 60% of GDP, but Mr Frydenberg wants it to rise further. “We are taking action to lift household consumption but there is also uncertainty out there, and I don’t think anyone wants to overlook that fact. There is uncertainty in the global economic outlook and that impact on investment decisions here at home.”

Australia interest rates at historic low

At its 1 October meeting, the Reserve Bank of Australia cut its cash rate to an historic low of 0.75%. Governor Philip Lowe wants to get inflation back to its 2-3% target and boost the economy and jobs. The 25 basis points cut was the third in five months. Mr Lowe says, “While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.”

Borrowing rates for both businesses and households are also at historically low levels. The Australian Dollar is at its lowest level of recent times. “The Australian economy expanded by 1.4% over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth.”  Employment has continued to grow strongly and labour force participation is at a record high. The unemployment rate has, however, remained steady at around 5.25% over recent months.

Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate, he says. “Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.” There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. “The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.” After the announcement, the Pound rose from around 1.818 in typical mid-market rates to around 1.835 on the day.

Brexit uncertainty still troubling the Pound

With time ticking ever closer to the proposed Brexit leaving date – 31st October – and no real idea of what kind of extension could be granted - there is still uncertainty over the terms upon which Britain will leave the European Union. This is putting pressure on the Pound against the Australian Dollar. New UK Prime Minister, Boris Johnson took over as UK Prime Minister in late July and initially prorogued Parliament. However, that was subsequently ruled as unlawful by the courts. Mr Johnson then removed the Tory whip from 21 MPs for voting against the government on Brexit and along with a few defections, the Conservatives lost their working majority. Unsurprisingly, the government went on to lose all the key parliamentary votes it has fought under Mr Johnson. But his determination to take Britain out of the EU by 31 October come what may has won over Leave voters. This has seen the Conservatives climb above second-placed Labour in the polls by around 12%. Knowing he has substantial lead, Mr Johnson has sought to call an early general election several times, but has been prevented by MPs. The opposition say that even if there was an election, it would not happen soon enough to prevent Britain leaving the EU on 31st October. As we wade into October, Remain MPs are attempting to hatch a plan to avoid a no-deal Brexit and the government is trying to leave the EU by 31 October, with or without a deal.

What next for GBP-AUD?

Unless a deal can be done that the markets believe is favourable, Brexit is set to further unsettle the Pound into the last quarter of the year. The Australian Dollar will be sensitive to the outcome of the US-China trade talks and how the economy will be affected down under.
There has not been a more favourable time to buy AUD than the Day before the UK voted to leave the EU in June 2016. The AUD has also struggled the past few weeks on the latest developments from US-China trade talks, along with the markets paying close attention to data from Australia to pre-empt any interest rate cuts this year.
Investors remain, for the most part, bearish on the AUD outlook. Many of the home-grown economic issues are being priced into the markets, but US-China developments and geopolitical factors are what will move the Australian currency in the weeks ahead.

Guidance for AUD buyers and sellers

If you are buying Australian Dollars, 1.90 is a sensible target level on AUD, with safer rates at 1.88.
For sellers of AUD, without taking the current price, you’ll be betting on the Brexit deal getting rejected and the Brexit date extended, which will cause GBP to fall back to the short term target of 1.85/1.83.