Around the globe there seems to be an underlying fear of just what Brexit in the UK and the newly released figures on the US GDP will trigger in global economies. It is no different for traders and businesses in Australia. However, it seems as though there is one ‘minor’ detail that is going largely unnoticed and this is the one thing that companies and traders in Australia should be looking at.
A Glance at Recent History
Instead of focusing on growing concern in the economies of two of Australia’s largest trade partners, economists should be looking back at recent history to see that no matter what happens, barring a total meltdown in either the US or the UK, the economy in Australia should remain largely unaffected and the AUD should remain strong in the coming months, at least throughout the first and second quarters of 2017.
During a huge recession in both the US and the UK from 2008 onwards, the economy in Australia stayed steady, unaffected by problems that beset many of the world’s largest economies. As those economies began to bounce back and their currencies rebounded to some extent, the AUD may have lost a bit of ground, but not enough to trigger any fear for the relative value of the AUD going forward. A look at some historical figures from trading sites like ETX Capital will authenticate that the AUD was largely unaffected, even during the initial fears when the rest of the world was in a state of panic.
Article 50 Is Officially Triggered
As the United Kingdom’s official envoy, Tim Barrow handed the official Article 50 letter from Prime Minister Theresa May to the EU Council President, Donald Tusk, the buzz was already viral on some key points. Article 50 is the way and means through which the UK will exit the EU. Yes, the economy is certainly in question but so too is the safety and wellbeing throughout the UK and the Eurozone from terroristic activity.
It seems like May’s letter has been perceived as a threat of sorts and that her negotiations appear to be contingent on security in the region. Tusk and other dignitaries in the EU are saying that security is not a bargaining chip and has no place on the Brexit table. The safety and security of citizens throughout Europe, inclusive of the UK, is not up for negotiations and should be kept out of Brexit.
How Will This Affect the GBP/AUD Pair?
These concerns are creating a stir in currency traders, but the AUD is still steady against the GBP, as neither the GBP nor the AUD is moving far from the 1.60 mark and has been relatively consistent throughout late March. Economists and market analysts state that ‘neither economy has what it takes to make a breakthrough’ and so it is expected that nothing will change in the near future. Bearing in mind that the UK is one of Australia’s largest trade partners, this does create some amount of concern, but again, it needn’t.
Why? Remember back to the Great Recession of 2008/2009 when the AUD remained strong despite global economies on a downward spiral. If a realistic forecast were to be made, the AUD would probably come out the stronger of the two currencies, but it is still early in an official Brexit, so both markets bear careful scrutiny in the days and weeks ahead. An important factor cannot be overlooked, and that is the fact that global corporations are focusing on vertical growth with Australia as a key market. This should boost the AUD while there is no inkling of similar confidence within the UK arena.
What a Somewhat Lower than Expected US GDP Will Mean to the AUD
This is a tricky forecast to make because with a Trump presidency and a promise to bring jobs back to the United States, anything can happen. It could significantly raise the recently revised 2016 GDP from its 1.6% rise in 2016 (the Real GDP remained unchanged) or it could have a totally different impact. Bearing in mind that the US GDP was 2.5% in 2015 and fell to 1.6% in 2016, there is some amount of concern over the future value of the USD.
The United States has been, and continues to be, the largest economy in the world but that could change sooner rather than later. Other global economies are sinking trillions into growth in technology and infrastructure which could affect global trade. President Trump, being a businessman at heart, understands the need to forge ahead but will he get the support he needs in both houses? That is still very much in question.
Currently the USD is still very strong against the AUD and that is not forecast to change any time in the near future. The only significant event to date, other than an unexpected Trump ascendency to the White House, is the reduction in the year-on-year GDP figures recently released. Even so, this is still not affecting the relative value of the United States currency on the FX market so traders are advised to continue current trading strategies in the USD/AUD pair.
A Brief Synopsis
What can be gleaned from all this is that the GBP is still shaky while the USD remains steady, despite a turnover in political powers in Washington. Yes, the GDP in the US is somewhat reduced from the current year, but that may have been due to widespread panic with an unexpected Trump victory and a presidential election in which neither candidate was really liked or even acceptable to much of the population.
The best advice at this point in time for FX traders is to pay close attention to Brexit as it unfolds and the quarterly reports on the GDP in the United States. How you trade will largely depend on how those currencies fare on a global market in lieu of unprecedented political events. The bottom line? This is a volatile time in which the adventurous trader stands to make a killing if betting in the right direction.
Source: Luke Hatkinson-Kent