Foreign Currency

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AFEX Update:

13 March 2019

Brexit deal voted down again, sterling slumps
 
The UK parliament has once again rejected the proposed Brexit withdrawal agreement between the UK and EU, prompting further instability in the House of Commons.  UK Prime Minister Teresa May was unable to gain enough support to see the amended terms accepted, with 391 MP’s voting against the changes whilst only 242 voted in support.
 
May has confirmed that parliament will now conduct two further votes to decide on the next steps from here.  The first vote will address whether MP’s wish to approve a ‘no-deal Brexit,’ whilst the second vote will seek to clarify whether the UK extends Article 50 and delays the UK’s departure from the EU beyond the March 29 deadline.
 
Immediately after the vote the sterling slumped in trade, losing ground against most other currencies.  AUD/GBP rallied above 0.5400, having touched 0.5325 earlier in the session, which was the lowest level since the Brexit referendum in June 2016.
 
The market is pricing in further volatility in the coming days as we await the results of the subsequent votes.
 
 
The AUD holds its recovery, looking for direction
 
The Australian dollar has bounced from key support at 0.7000 on Friday to test resistance at 0.7090 overnight.  Market sentiment is keeping the dollar buoyed, but there are plenty of headwinds in the face of a deteriorating domestic economy that should keep the AUD subdued over the longer-term.
 
Looking at the charts, a break topside through 0.7090 brings 0.7120 into play ahead of key resistance at 0.7145.  However a break downside through 0.7060 and the downside trend is likely to resume.  Support at 0.7050, 0.7020 and 0.7000.
 
Sentiment likely to remain as the key driver of the Aussie dollar over the coming days, until we learn more about any progress between the US and China in regards to their trade dispute.

 
James King
Head of FX Dealing – Victoria




13 February 2019

Time for some consolidation for the AUD this week.  With the ‘Aussie bears’ finding their voice again, it’s making the task for a bounce higher all the more difficult.  I’m still somewhat optimistic that the US and China will make progress on the trade war.  But what impact this will have on the AUD is the key question.  I’m targeting 0.7200 for AUD/USD in the coming weeks if there is progress.  A downgrade from my original 0.7400 hopes, but given the change in sentiment from the RBA, I suspect the topside will be limited.
 
 
Importers:  I suggest being very proactive with your requirements.  If 0.7000 (or below) is an issue, there are things that you can do now to address this.  If you have capacity to hold and ‘hope’ for a squeeze higher, I suggest having everything ready to go to pounce if the opportunity arises.
 
Exporters:  I imagine that the AUD at these levels helps out immensely.  Particularly if we compare to 12-months prior when dealing 0.8000+.  Buying on the dip makes sense to me.  Be wary of a potential short-term squeeze higher, but most in the market suspect a lower Aussie dollar is the new norm over the longer-term.  Even with that being the case, there are still strategies that you can implement to provide out-performance.
 
 
It has been a relatively quiet few days for the Australian dollar after a tumultuous week last week.  The RBA’s change in stance has put the ‘Aussie bears’ in control as they test key support just above 0.7000.  In case you missed last week’s news, RBA Governor Lowe stated:
 

  • “Over the past year, the ‘next move is up’ scenarios were more likely than the ‘next move is down’ scenarios.  Today the probabilities appear to be more evenly balanced.”
  • “It is possible that the economy is softer than we expect and that income and consumption growth disappoint…lower interest rates might be appropriate.”

 
This is a clear change in tack by the RBA, who spent all of 2018 preaching that the next move in rates was likely going to be higher…albeit with a longer-term view on when this would be.  Whilst Governor Lowe’s statements refrain from committing to anything in the short-term, it’s the change from optimistic to neutral/realistic that has caught the market’s attention and driven the AUD weakness.
 
Looking ahead, the key themes are:
 

  • US / China trade dispute.  If there is any positive progress, then you would imagine the AUD would take some benefit.  However if it stalls and regresses, then this is another reason for the ‘sellers’ to push the AUD lower.
  • Economic data.  Given this is what will dictate central bank policy, every data release is dissected for its impact on future interest rate direction.  Key releases this week:
    • Wed      US inflation
    • Thu       US retail sales

 
If you would like to discuss the FX market in greater detail, in conjunction with your own business requirements, feel free to give me a call on 03 8692 4404.

Regards,

James King

Head of FX Dealing – Victoria

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