Weaker-than-expected Chinese Manufacturing PMI set the Australian Dollar on a downtrend at the start of last week. With the manufacturing sector of the world’s second largest economy edging perilously close to contraction territory markets were inclined to revert to a state of risk aversion. Due to the Australian economy’s close connection with China and the sensitive nature of the commodity-correlated ‘Aussie’ this disappointing showing saw investors turning to AUD’s rivals.
Support for the antipodean currency failed to materialise as the Australian Manufacturing PMI and NAB Business Confidence Index both showed a decline in April. Together these offered a stark reminder that the domestic economy is still struggling to rebalance itself away from its dependence on the mining industry.
Consequently, this prompted the GBP/AUD exchange rate to trend higher ahead of the Reserve Bank of Australia’s (RBA) May policy meeting, with Sterling benefitting from the lack of Pound volatility on the bank holiday Monday.
Counter to the more laid-back commentary of recent weeks, the RBA shocked markets by cutting interest rates from 2.00% to 1.75%. This move saw the GBP/AUD exchange rate jump sharply, rallying from 1.9051 to 1.9403 in the immediate aftermath of the decision. Investors were largely caught off-guard by the central bank’s choice to ease monetary policy, with the appeal of the ‘Aussie’ sharply undermined as a result.
Stronger Australian Construction Unable to Shore up ‘Aussie’
While the latest round of UK PMIs proved generally disappointing this failed to dent the bullishness of the GBP/AUD currency pair. The UK manufacturing, construction and services sectors all showed slowing output in April, suggesting that the UK economy continued to feel the negative impact of ‘Brexit’-based uncertainty. As a result the UK Composite PMI slipped sharply from 53.6 to 51.9, increasing the odds of further dovishness from the Bank of England (BoE) this week.
Despite the Australian trade deficit narrowing by more than anticipated in March, the Australian Dollar continued to struggle ahead of the weekend. A sharp improvement in the domestic Construction PMI was also overlooked by markets, despite the index rising from 45.2 to 50.8 as the sector returned to a state of growth. Investors were primarily concerned with the RBA’s monetary policy statement, which confirmed the more cautious mood of policymakers.
However, while the GBP/AUD exchange rate climbed to a twelve-week best of 1.9704, it failed to hold this level for long. Risk appetite was generally boosted on Friday as the April US Non-Farm Payrolls report proved decidedly weaker than expected. As the headline figure printed distinctly lower than forecast the odds of the Federal Reserve opting to hike interest rates in June fell further.
No Change Forecast from BoE as GBP/AUD Rally Stalls
Although the ‘Aussie’ has recovered some of its losses, it struggled to maintain an uptrend as the April raft of Chinese trade data proved discouraging. Confidence in the Pound, meanwhile, remained a little more muted as the British Chambers of Commerce indicated that its latest poll of members had revealed a narrowing in support for the ‘Remain’ campaign. With uncertainty over the outcome of the EU membership referendum continuing to weigh on sentiment, this took some of the wind out of the GBP/AUD exchange rate, which trended in the region of 1.9668.
Volatility is expected in response to the BoE policy meeting on Thursday, even though policymakers are not likely to demonstrate any particular change in outlook at this juncture. Should the central bank’s latest inflation report prove more pessimistic, however, the Pound could slump across the board as hopes for an interest rate rise retreat further.
Demand for the Australian Dollar, on the other hand, could pick up if the Consumer Inflation Expectation for May indicates a greater measure of confidence within the domestic economy. Stronger inflationary pressure would discourage the need for the RBA to imminently cut rates again, although a poor showing could damage confidence.
Heads Up
Summary of major upcoming data releases that we think may move the market.