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The Experts

The Aussie $, Brexit and the euro

Mikey Carmody
Tuesday, February 12, 2019

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Q1. Has the Phil Lowe revelations on a possible rate cut changed the view on the Aussie dollar?

Phil Lowe’s speech caused a considerable sell off in the Australian dollar (AUD) last week, as the market went from pricing half of a rate cut by the end of the calendar year, to pricing in a full rate cut.

The market seemed to focus on the comment – “In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point”

The RBA then came out on Friday and downgraded GDP from 3.25% to 2.5% for the year ending June 2019.

Focus is now squarely on house prices and the negative wealth effect and the broader global economy.  If future data portrays a tighter economy, expect a rate cut and AUD below 69 cents.

However, currently unemployment is strong and inflation is close to the 2-3% target band, so we would need to see a shift in these metrics to confirm a cut from the RBA. 

Q2. What’s the outlook for the pound with Brexit and why?

The Great British Pounds has been one of the more volatile currencies over the last couple of weeks.  The market’s optimism was high when May survived the confidence vote, however, a lack of progress in domestic and international negotiations, the Bank of England cutting growth forecasts and UK data starting to show a slowing in business activity, has dampened some of this spirit.

Compared to a month ago, more risk is being priced into a negative event and GBP breaking below 1.2000, however consensus is still for a Brexit deal to be reached and GBP to reach 1.45-1.50 by the year’s end.

Unfortunately, the outlook is not clear and we still need to watch the headlines and follow the negotiations and this volatility will continue for some time yet. 

Q3. What’s the outlook for the euro with slowdown talk increasing and why?

The Euro has been on a slow and steady decline this month and we would expect that to continue throughout the year.  Eurozone data has continued to disappoint and the Brexit worries continue, however it has been ECB officials who have been the main driver in this recent decline.

The ECB has stated that there is no urgent need to offer new long-term loans to banks and that they’re not definitely going to do so at their next policy meeting. If this is true, this lack of liquidity will stifle growth.  The Italian–German bond spread has widened recently, which suggests that even with the German economy struggling, the rest of the Eurozone is doing worse.

We would expect the Euro to continue to decline against the US dollar to the 1.1000 level.

Published: Tuesday, February 12, 2019

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