Updated: Mar 28, 2021
In the next week the UK will start to head out of their one month long national lockdown in time for the Christmas rush. However, what impact has the measures already had? Do we have an underlying issue that could have a bigger impact? Yes we do and that’s Brexit. It’s managed to slip under the eyes and ears of most people over the past few weeks but the OBR has estimated that the no deal confirmation on a trade deal with the EU and other trading partners is going to have a larger “economic hit caused by Covid-19”.
The main reason being there’s been a “lack of progress” between the UK and EU governing bodies probably due to the pandemic which makes a no-deal scenario probable.
GBPAUD High Level Summary
Forex Macro Currency Strength Meter - Logikfx
When considering the fundamental analysis of GBP/AUD we must analyse how those specific economies are doing on a domestic level (individually first). To do this quickly, I’ve used the currency strength meter. This saves us hours of time to manually go through excel. If you’ve ever used a MACD indicator or any type of SMA or EMA it works in a similar way.
Let’s take the example of GBP/AUD above. We can see since 17/10/2020 the AUD line has been rising over the past month signalling potential strength in Australia. On the flip side, GBP has had the opposite dropping in value. We can see a significant cross over from positive to negative last week between 14/11/2020 and 21/11/2020. This shows that on a domestic economic level the fundamentals are saying that GBP is weaker than AUD meaning we should be focusing on short positions and not trying to long the pair GBP/AUD.
That’s why overall, we’ve got a bias to short GBP/AUD!
Gross Domestic Product GDP Differentials
Interestingly over the next year the IMF have predicted a huge change in the differential for the UK and Australia for 2021. The UK is set for a GDP growth rate of 6% whereas, Australia is set for a 3% GDP growth rate. Both economies are set to recover from the pandemic next year.
Currently this means that based on these forecasts and data the GDP potential growth rates are not yet agreeing with our short idea based on the currency strength meter. This must be considered in the final point of decision, but at the same time we should monitor the GDP differentials to keep an eye on potential forecast changes which can happen more frequently during turbulent economic climates.
Gold vs GBPAUD
Gold is still major export and import in the UK and the Australia. so we’ve included it within the analysis between the two countries. What we’ve found is a -45% correlation between the Gold commodity and GBPAUD. Therefore as gold goes up generally GBPAUD goes down and as gold goes down generally GBPAUD goes up. Currently, Gold prices have taken a big hit peaking at 2000 so we’ve actually got a long bias on GBPAUD which goes against our idea to short GBPAUD.
COAL vs GBPAUD
Another major commodity that Australia exports is Coal. Since, it has such a huge impact on the commodity floating exchange rate of the Australia Dollar. What we saw is that as Coal prices over the past 10 years had a -62% correlation with GBPAUD and very recently there’ been a huge rise in Coal pricing. This is great for our short idea on GBPAUD as the rising price in coal creates a huge potential downside move in GBPAUD.
GBPAUD vs WTI
Crude oil is again a popular export for the UK. Overall in the past 10 years GBPAUD has had a negative correlation of -62% too! The same correlation as Coal did to Australia. SO as the Oil prices go up GBPAUD prices should go down. Guess what? That’s exactly what’s been happening very recently in the past couple months. However, if this trend continues and oil prices recover, inevitably GBPAUD will hit another downwards trend. Overall the imports and exports 2/3 indicators are showing that we should be short on GBPAUD moving forwards.
Interest Rate Differentials
The interest rates have been really interesting for GBPAUD the blue line has been on the rise since 2015 meaning the interest rates have been tightening between UK and Australia. This has also been in favour of the UK meaning potential upside in the GBP which can be seen starting in 2016. However, an interesting dip in the data shows that recently in March the interest rate differentials took a dip and we saw GBPAUD hit a landslide dropping in value heavily.
FTSE100 Stock Market Index Analysis
FTSE100 priced in AUD has a very interesting relationship with GBPAUD. It’s almost the ultimate leading indicator for predicting GBPAUD. Overall, we can see how FTSE100(AUD) and GBPAUD almost look identical. Recently during the start of the pandemic the FTSE100 was first to take a hit then a month later GBPAUD followed suit! Recently FTSE100 has been on the rise so it’s not great for our idea but will this trend continue as there’s still as mentioned in the introduction a lack of progress on trade deals and COVID-19 vaccine rates still not in major production until later next year.
Commitment of Traders Analysis (COT REPORT)
Overall, the COT reports are showing positive signs of being on the right side of GBPAUD. Hedge funds have continued to short sell GBP as open interest continues to move down and long AUD as open interest this week went up. This confirms the sentiment of the markets being on a short bias for GBPAUD.
Price & Technical Analysis
On a high level broad view we can see that GBPAUD has been down trending since early this year. Recently it's started congesting at the price level indicated on the red line. Based on the overall fundamentals the short side move looks promising and the bearish candle formations (head and shoulders) could be the catalyst!
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