An unexplained Pound crash last week set the GBP/AUD exchange rate on a persistent decline, with the pairing falling five cents over the course of the past seven days.
Pound Flagging against Australian Dollar after Mysterious ‘Flash Crash’
The Pound has been left in a severely weakened state after a ‘flash crash’ during Friday’s Asian trading session. Sterling has been on what Bloomberg believes to be the worst four-day decline since the referendum after a suspected ‘fat finger’ trade or algorithmic error was exacerbated by the thin trading atmosphere.
An initial -2.1% drop against the Australian Dollar in the space of minutes, the Pound has continued to edge lower. Experts claim this makes Sterling even more undervalued, but it seems the markets are unwilling to buy back into GBP thanks to persistent fears of a ‘Hard Brexit’.
Prime Minister Theresa May has raised concerns over a ‘Hard Brexit’ even further after stating recently that Parliament will not be afforded a vote on the matter. Markets had hoped that MPs would have been able to curb the most extreme parts of the government’s Brexit plans in the Commons.
Adding to market concerns are leaked Treasury documents suggesting that public sector receipts could be between -£38bn and -£66bn lower after fifteen years of a ‘Hard Brexit’ due to a median estimated reduction in GDP of -7.5%. The Bank of England’s (BoE) Anil Kashyap noted that part of the hit to the Treasury would come from lost financial services jobs;
‘You don’t have to lose lots of that before you have a hole in the budget that could be meaningful. And that could have some knock-on effects for the exchange rate.’
RBA Freezes Rates, Holds Easing Bias; Australian Dollar Weakens as US Hike Bets Rise
Tuesday’s interest rate freeze from the Reserve Bank of Australia (RBA) initially strengthened the Australian Dollar, although the ‘Aussie’ was softened again as economists began to decode the accompanying policy statement. A merely cautious positive assessment of the economy, combined with a large focus on the housing market suggested policymakers still had concerns, while the non-committal closing lines showed that the RBA wanted to keep its options open with regards to further rate cuts.
ANZ economist Felicity Emmett explained;
‘We continue to think that rates are on hold, but the RBA retains an easing bias. The forward guidance in today’s statement suggests to us that monetary policy is on hold for the time being as the Bank gauges the impact of the rate cuts in May and August. We think the RBA’s easing bias was evident in Governor Lowe’s recent parliamentary testimony when he noted that “certainly there are scenarios where rates would fall again and there are scenarios where they would not need to fall again”.’
The ‘Aussie’ was further undermined by bullish US data on Wednesday, where the ISM non-manufacturing composite index leapt up from 51.4 to 57.1, helping to send rate hike bets up to their current level of around 70%.
The Australian Dollar was able to make strong gains yesterday in the wake of numerous negative developments, thanks to thin trading of the US Dollar. The US markets were closed in celebration of Columbus Day, sparking a bout of risk-appetite amongst currency traders.
GBP/AUD Exchange Rate Forecast
There is little UK data on the calendar this week, although considering the way markets are behaving at the moment, ecostats are having little impact upon the Pound. Ever since Theresa May announced the timeline for triggering Article 50, Sterling has remained impervious to reports that should have been supportive, including key releases such as the Markit PMIs.
If the markets are in a mood to listen to data, the RICS house price balance on Thursday and Friday’s BoE credit conditions and bank liabilities survey will be the most pertinent releases.
Australia’s data docket is slightly fuller, containing Wednesday’s consumer confidence survey and Friday’s consumer inflation expectation data. The largest ‘Aussie’ movements are likely to be triggered by outside events, however, with Thursday and Friday holding the Chinese trade balance and consumer price index respectively.