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AUD Nears 7-Month High Vs GBP, on Australian Trade Surplus

Market CommentaryAUD Nears 7-Month High Vs GBP, on Australian Trade Surplus
AUD Nears 7-Month High Vs GBP, on Australian Trade Surplus
Australian Dollar to Pound.

The Australian dollar to pound interbank exchange rate has hit 0.5599 today. This is its strongest since January 14th 2019, or close to seven months.

By comparison, on May 6th, the Australian dollar was as low as 0.5303 versus the British pound. So it's since risen by close to +3 cents, or by +5.58%.

This might benefit you, if you're a Brit selling property abroad in Australia, or you’re an Australian business owner making international payments to the UK.

This is because, when you exchange Australian dollars to pounds, you might now get a higher pound total in your UK bank account, compared to earlier this year.

In turn, this would make it more profitable to repatriate the funds of your Australian property sale to the UK, or cut your currency for your business costs to import British goods.

You can stay up-to-date with the Australian dollar to pound interbank exchange rate on Pure FX's Rates & Tools page. Just select 'AUD' to 'GBP' to see the last week's exchange rates.

You can also check what's affecting the value of the Australian dollar versus sterling on our AUD to GBP Exchange Rate Updates page. Simply click on the latest article.

A first factor why the Australian dollar to pound interbank exchange rate neared this seven-month high is because Australia's trade surplus reached a record high in May.

A second reason why the AUD has neared this seven-month high versus the GBP is because the financial markets think it's less likely that the Reserve Bank of Australia (RBA) will cut interest rates again in 2019.

A third explanation why the Australian dollar has risen in value against British sterling is because the UK's dominant services sector came close to stagnating in May, we learnt yesterday.

Let's look more closely at these reasons why the Australian dollar to pound interbank exchange rate has risen. You can use this information to decide when to transfer money to the UK.

Australian Dollar Rises Versus Pound, as Australia's Trade Surplus Grows

As I mention, a first reason why the value of the Australian dollar against the British pound sterling has risen is because Australia's trade surplus expanded in May.

According to the Australian Bureau of Statistics (ABS) on Wednesday, Australia's trade surplus reached AU$5.74 billion in May. This is above financial markets' forecasts for AU$5.25 billion, plus April's AU$4.82 billion.

This is Australia's highest trade surplus on record, exceeding February 2019's recent all-time high. Australia has now recorded trade surpluses for the last 17 consecutive months.

This follows a string of deficits in Australia's balance of exports to imports before that, from early 2012 to October 2016. In particular, Australia's exports grew by a mighty 4% in May.

Australia's trade surplus was lifted in May, by higher international demand for Australia's commodities.

To be specific, Australia's sales of iron ore rose by 13% in May, and by 49% compared to a year ago, while Australia's exports of Liquefied Natural Gas (LNG) also increased by 33% compared to 12 months ago.

The value of Australia's trade surplus is also being boosted by the high price of iron ore on the global markets. A ton of iron ore now costs $120, a considerable rise in recent months.

This means that, when Australia exports its iron ore to international customers, especially China, it's more profitable for Australia, compared to if iron ore were cheaper.

These optimistic trade surplus figures have strengthened the Australian dollar, first because they suggest that Australia's economy is resisting well the rise in global trade tensions.

At a time when the USA is raising trade disputes with major economies like China, the Eurozone or Mexico, Australia is nonetheless succeeding in selling more of its goods abroad.

These upbeat trade data have also boosted the value of the Australian dollar versus the pound, because they'll support Australia's economic growth in Q2 2019, between April and June.

When Australia's exporters do well, they're likelier to invest in new machinery, hire more staff, and pay higher wages. This contributes to Australia's prosperity, and boosts the AUD too.

AUD to GBP Gains, as RBA Less Likely to Cut Interest Rates Further

In addition, another factor why the Australian dollar has risen in value versus the British pound is because it's thought less likely that Australia's central bank, the Reserve Bank of Australia (RBA) will cut interest rates again this year.

This follows the RBA's decision to cut interest rates on Tuesday to a new all-time low of just 1.0%.

The Reserve Bank reduced interest rates on Tuesday, to try and lift Australia's inflation back to the RBA's official target band of 2-3%.

Australia's inflation has held below this target for several years, pulled lower by weak business investment, low wage rises, plus a subdued housing market in Australia's economy since the middle of this decade.

The RBA cuts interest rates to lift inflation, because when Australia's interest rates are lower, this makes it cheaper to take out loans.

In turn, this encourages businesses to borrow money to invest, or households to take out mortgages. This stimulates economic activity in Australia, in turn contributing to lift price pressures, otherwise known as higher inflation.

Normally, we'd expect the Australian dollar to weaken when the RBA cuts interest rates. This is because, while lower interest rates help to lift Australia's inflation, they make investing in Australian assets less profitable.

After all, lower interest rates mean lower returns. This cuts demand for the Australian dollar among the world's money managers, which in turn reduces its value.

However, unusually, the Australian dollar rose following the RBA's decision to cut interest rates on Tuesday.

It's thought that this is because RBA Governor Philip Lowe accompanied the central bank's decision, by implying that it's less likely that the RBA will reduce interest rates further in 2019. In particular, Mr. Lowe said that the RBA "will adjust monetary policy if needed".

It's the "if needed" that's led financial markets to think that the RBA is less likely to cut again to 0.75% this year.

This is because the "if needed" suggests that the RBA will watch how Australia's economy performs in coming months, following this week's rate cut, to see if further stimulus is required. This is to say, Australia's central bank won't automatically cut borrowing costs further.

As a result, the world's investors will watch Australia's economy too, to see if the RBA will have to cut interest rates further in 2019.

In the meantime, the jury is out about whether Australia's central bank will have to cut borrowing costs to 0.75%. This doubt about whether the Reserve Bank will further reduce interest rates has contributed to strengthen the Australian dollar.

Australian Dollar to Pound Rate Rises, as UK's Services Near Standstill in June

Also, another partial explanation why the Australian dollar to pound interbank exchange rate has neared this seven-month high is because the UK's dominant services sector neared standstill in June, said trusted statistics on Wednesday.

In turn, it's thought that the UK's GDP (Gross Domestic Product) may have contracted in Q2 2019, between April and June this year.

According to economics watchdog IHS Markit yesterday, the UK Services PMI (Purchasing Managers' Index) fell to 50.2 last month. This is below economists' forecasts for 51.0, and May's figure of 51.0.

It's also very close to the 50.0 that separates growth from contraction. This tells us that UK services activity came very close to stagnating in June.

The UK's services sector neared a standstill last month, because of Brexit uncertainty.

In particular, we've passed the UK's original Brexit deadline of March 31st, and businesses still have no greater certainty about the UK's future relationship with the EU, ahead of the new deadline of Halloween. So owing to this uncertainty, businesses are reducing their activity.

Following this release, Chris Williamson, Chief Business Economist at IHS Markit, said that: "sentiment about the year ahead is worryingly subdued, suggesting the third quarter could see businesses continue to struggle."

This suggests that the UK's services sector, which makes up 80% of the UK economy, may continue to wobble in Q3, from July to September.

This downbeat UK services release follows disappointing data from Britain's manufacturing and construction sectors earlier this week too. Both these sectors are contracting at the quickest pace in several years.

Overall, IHS Markit's composite PMI for these three sectors in June fell to 49.2. This is its first time below 50.0 since July 2016, the month after the UK's vote for Brexit.

As a result, IHS Markit forecasts that UK GDP shrank by -0.1% in Q2. Meanwhile, the trusted economics body NIESR (National Institute of Economic and Social Research) predicts that Britain's economy contracted by -0.2% between April to June.

This suggests that the Brexit uncertainty is now having a clear effect on Britain's economy, thus weighing down sterling.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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