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Supply Chain Risk

Buy The AUD, Sell The GBP Say Nordea Analysts

Pound-to-Australian Dollar-rate-

Currency forecasters at Nordea Markets are tipping the pound to Australian dollar exchange rates to fall.

“If commodity prices rebound on a slightly more broad-based basis, then you better buy a truckload of AUD versus GBP before it happens. USD is historically the worst currency to own if Gold rallies (that is by the way NOT the case currently), but GBP is the second worst. AUD is on the other hand high beta to commodity price increases, no matter whether its gold, copper or something third. We consequently like the short GBP/AUD bet and decide to enter, even though we are still not convinced of the “world is healing” narrative.”

The Pound to Australian Dollar (GBP/AUD) exchange rates held at around AU$1.87 over the Festive Season as UK markets reacted negatively to Prime Minister Boris Johnson’s cap on the UK-EU ‘transition period’ until a strict deadline of late December 2020.

This left Pound Sterling investors feeling jittery on the prospect of a cliff-edge Brexit resulting in a no-deal between the UK and the EU by the end of 2020.

Dean Turner, UK Economist at UBS Global Wealth Management, also commented that the UK’s market optimism would deteriorate in the New Year, saying “It’s possible that there will be some bounce in activity given the clarity on Brexit, but any improvement in sentiment is likely to fade as the next Brexit deadline draws closer.”

Post-Brexit speculation dominate market attention last week, due to no influential UK economic data being released until after the festive season.

Hann-Ju Ho, Senior Economists at Lloyds Bank, commented “There is now clarity over the UK’s departure from the EU, but the focus will turn to whether a new trade agreement can be negotiated during the transition period which currently runs until the end of next year.”

Meanwhile, Friday saw the release of the UK Markit Manufacturing PMI for December, which fell below forecasts at 47.5 and left markets feeling increasingly concerned over the health of the British economy after the 31st January Brexit date.

Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, was downbeat in his analysis, saying “[I]t still feels like a long road ahead for manufacturing to recover its losses from this year and there will still be some obstacles to overcome in 2020.”

The GBP/AUD exchange rate closed last week subdued, however, trading at around AU$1.881 as Brexit concerns held back market confidence in Sterling.

Australian Dollar Exchange Rates Steady as US-Iran Tensions Hits Risk-Averse Aussie

The Australian Dollar (AUD) benefited from optimism over a US-China trade deal last week, after US President Donald Trump announced that a phase one trade deal between the two superpowers could be signed off as early as the 15th January.

Donald Trump tweeted:

‘I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!’

Meanwhile, Wednesday saw the release of Australia’s Commonwealth Bank Manufacturing PMI for December, which fell deeper into contraction territory at 49.2.

The Commonwealth Bank said in its statement:

‘The manufacturing downturn was led by the steepest rate of decline in new orders in the series history during December. In flows of new sales fell for a third straight month despite rising exports… Job shedding was reported for the first time in three months, with the rate of decrease the second sharpest seen since the survey began just over three-and-a-half years ago.’

However, last week also saw US-China trade relations effectively eclipsed by heightened geopolitical risks surrounding US and Iran. This follow Donald Trump’s ordering of an air-strike on Iran, which escalated tensions between Washington and Iran.

As a result, the ‘Aussie’ suffered from its risk-correlated position as traders fled to safe-haven currencies like the Swiss Franc and the US Dollar.

Olivier Jakob, managing director of Petromatrix, was downbeat in his analysis, saying “The killing of Soleimani calls for a serious increase of the geopolitical risk premium. This was supposed to be a holiday week for many traders. Many will be cutting the holidays short and call-in for an emergency risk meeting.”

Could Brexit Jitters Drag Down the Pound Exchange Rates?

Sterling traders will be looking ahead to Monday’s release of the UK Markit Services PMI for December. Any signs that the index could emerge from contraction territory would boost the GBP/AUD exchange rate as the UK’s largest sector marks signs of improvement in the New Year.

‘Aussie’ investors will be looking ahead to Wednesday’s publication of the Australian Building Permits figure for November, which is expected to rise from -8.1% to 0.4%. As a result, we could see the Australian Dollar make some gains as the outlook for the Australian economy brightens.

These will be followed by the Australian AiG Performance of Construction Index for December. Again, any signs of an uptick in this index would prove AUD-positive.

Looking ahead to Thursday, the Australian Trade Balance figure for November could provide some uplift for the AUD/GBP exchange rate, with the figure expected to improve from 4,502 million to 6,100 million.

US-China trade developments will, however, continue to drive the AUD/GBP exchange rate this week. Any signs of the two superpowers confirming a deal sign-off on the 15th January would boost risk appetite for the ‘Aussie’.

Brexit will also remain in focus for Sterling traders, with any signs of the UK facing a bumpy ride this year likely to dampen market confidence in the Pound and weaken the GBP/AUD exchange rate.

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