- Reserve Bank of Australia interest rates on hold, despite growth fears
- House prices are falling – will employment rates follow?
- Three weeks to go until Brexit and still no deal
As the fears over a no deal Brexit receded at the end of February, so the fortunes of GBPAUD took off. The monthly low for GBP in the pairing of 1.788 in typical mid-market rates came on 5th February, when the Australian Dollar issued surprise guidance hinting that the next move in interest rates could be a rise. But GBP has since undergone a steady rise, as it seems more likely that the UK and European Union will be able to reach agreement before 29th March. That’s the date that Britain is due to leave the EU. The high of 1.871 came on 28 February and edged higher in early March to 1.872.
RBA interest rates on hold, despite growth fears
The Reserve Bank of Australia (RBA) has kept rates on hold, despite the Australian economy cooling, and warned of ongoing dangers to growth. On Tuesday 5th March, the board left the cash rate unchanged at 1.50% for the 27th time running. RBA Governor, Philip Lowe, says,” The outlook for the global economy remains reasonable, although downside risks have increased. The trade tensions remain a source of uncertainty.”
“In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies.”
The Australian Dollar has remained within the narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time, he says.
The labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 5%. A further decline in the unemployment rate to 4.75% per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas.
Other indicators suggest growth in the Australian economy slowed over the second half of 2018, he explains. “The central scenario is still for the Australian economy to grow by around 3% this year. The growth outlook is being supported by rising business investment, higher levels of spending on public infrastructure and increased employment.”
The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities. A pick-up in growth in household income is nonetheless expected to support household spending over the next year. The adjustment in the Sydney and Melbourne housing markets is continuing, after the earlier large run-up in prices. Conditions remain soft in both markets and rent inflation remains low. Inflation remains low and stable. The central scenario is for underlying inflation to be 2% this year and 2.25% in 2020.
Headline inflation is expected to decline in the near term because of lower petrol prices. Dr Lowe concludes, “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
After the announcement, the Aussie gained ground, with GBPAUD falling from 1.86 to around 1.85 before recovering a little.
House prices are falling – will employment rates follow?
Home values in Australian have fallen 6.3% in the year to February, according to figures from CoreLogic. That’s the biggest decline in median prices since the Global Financial Crash. The median value is now $524,478. Even so, prices are still 18% higher than five years ago. Values in Sydney fell 10.4% year-on-year to $789,339, the first double-digit drop in more than 35 years. The average Australian property is being sold for 5.7% less than the original listing price, a six-year low. The worry for economists, is that were house price trends lead, employment rates often follow. In fact, in January 2019, employment growth slowed from 3.5% to 2.2%. in just over a year. And in February, Australian job adverts fell 4.3% year-on-year, the fourth decline in a row and the sharpest for five years.
As ANZ Bank has pointed out, the next year looks likely to be more challenging. If inflation starts to rise, the Reserve Bank of Australia may look to cut its cash rate, rather than raise it, economists believe. The weakness of the construction sector was illustrated by the number of new homes approved falling 3.2% in January in trend terms, according to the Australian Bureau of Statistics (ABS) today. The figures come on top of further falls in the last year to reach the lowest level in almost five years. The decrease was led by private sector dwellings excluding houses (e.g. townhouses and apartments), which fell 8.1%. Private sector houses also declined, by 0.4%. That said, in seasonally adjusted terms, total dwellings rose by 2.5% in January, driven by rises in Western Australia (28.8%), Tasmania (15.4%) and New South Wales (12%).
Three weeks to go until Brexit and still no deal
There are now just three weeks to go until Britain is due to leave the European Union, and still o-one knows how the long-running saga will finally work out. During February, the Pound gained ground against major pairings, including the Australian Dollar on hopes that agreement could be reached with the EU before the 29th March leaving date. Some important issues are on their way to being resolved. The UK government has agreed to seek to safeguard citizens’ rights, whether or not there is a no deal Brexit. It accepted MP Alberto Costa’s amendment at the end of February that if no deal is reached over Brexit, it will seek an agreement from Brussels to protect the rights of British nationals settled in the EU and EU citizens in the UK. The amendment “requires the Prime Minister to seek at the earliest opportunity a joint UK-EU commitment to adopt part two of the Withdrawal Agreement on Citizens’ Rights and ensure its implementation prior to the UK’s exiting the European Union, whatever the outcome of negotiations on other aspects of the Withdrawal Agreement.”
As a result, the Pound rose to near 1.95 in typical mid-market rates – a six-month high, boosted further by rumours that the European Union could demand an extension for British membership until December 2020. MPs also passed the Cooper/Letwin amendment saying that if MPs vote to delay Brexit, the government should seek an extension from the European Union and bring forward legislation to change, in law, the date of the UK’s departure. It is not binding in the same way as an Act of Parliament, but is an expression of the will of the House and that would be politically difficult for Prime Minister, Theresa May, to ignore.
In any case, the amendment simply formalises the promises made by Mrs May the day before to allow MPs to prevent no deal and seek an extension to exit day. After the votes, Reuters asked major banks and financial organisations to assess the risk of a no deal Brexit. The answers ranged from 10% to 53%, illustrating that no-one really knows how Brexit will end. An important date comes on Tuesday 12thMarch – the next deadline for the Meaningful Vote by British MPs, should no deal or major changes have been made beforehand. With that in mind, it is important to keep abreast of the news, watch the markets and stay in touch with your Halo Financial Currency Consultant, if you are due to exchange Sterling and Australian Dollars.
Guidance for AUD buyers and sellers
After breaking the resistance level that was capping GBPAUD at 1.8450 on 27th Feb, the rate rallied to 1.8730, which is the level it reached back in October 2018. It’s currently trading sideways around 1.85-1.87 and has been holding that range for the last two weeks. If prices do break up through 1.8730, it should continue on to 1.8880, which is the top of the channel that has been in play since 2016, so that will likely cap it. Beyond that, the next level of resistance comes in at 1.8960 (50% of the move from 2015 high of 2.2355 to the 2016 low at 1.5576).
Australian Dollar buyers should therefore consider trading some funds here and up to the 1.88-8950 level and sellers could look for a correction back to the 1.8450 support level.
Get in touch with a Currency Consultant for more guidance on what’s happening with the Australian Dollar.
Article supplied by Halo Financial, March 2019
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