If you’re looking to exchange your Australian Dollars (AUD) for Great British Pounds (GBP), you’re probably interested in what the forecast is like over the next year or so. If you’re living in Australia, you may have heard a few different stories about the state of the economy. The truth is, no-one’s sure. We’re going to give you an overview of the factors driving the AUD/GBP and how we think they might affect the currency in this 2016 forecast.
Commodities and Exports
Australia’s key exports include iron ore (26% of its total exports), coal (16%), petroleum (6%) and gold (8%). Demand for these come mainly from the world’s largest economic producing countries, such as India and China. While China is slowing down in terms of historical GDP growth, India (as a developing economy) is slowly starting to catch fire in terms of development and progression. As a result, demand for key Australian exports (and therefore demand for the currency) is a mixed bag. While there are current fears of a recession in Australia, which could substantially devalue the dollar, this is only conditional on a further downturn in China’s economic state. While this is difficult to predict, given the little information that flows from China to the Western world, this seems unlikely. Many commentators believe that the Chinese growth panic is overdone, and the pessimism in financial markets is just raw fear. As such, they argue that a further decline is unlikely – and a rebound is soon in order. As to what will actually happen – it’s tough to call.
There’s also an issue that many of Australia’s exports (including coal and petroleum based products) are considered “dirty fuels” and are going to be phased out in the long term in favour of more environmentally-friendly alternatives like solar energy. But there isn’t too much to worry about – Australia recognises this and is working to diversify their economy away from the mining boom that has helped them through the recent decades, to reduce the risk of commodity price volatility. Instead, Australia is doubling down on financial services (such as the big banks – ANZ, ASB and Westpac), education and tourism. Over the long term, prospects look healthy, but there are likely to be some bumps in the short term.
The UK’s exports are a little more diverse and include mainly cars (9%) and gas turbines (4%). This means that demand for the currency is a little more stable, compared with the AUD. This makes it difficult to predict what will happen to the pair over the short term – it mostly relies on what happens to the Australian economy.
There is evidence that the price of gold is surging, as it is a safe haven for investors that are looking to protect themselves from rising global uncertainty in financial markets. Investors like gold, particularly in times of fear, because it is physical and has intrinsic value – unlike some traditional paper assets (stocks, bonds and derivatives). This is a positive for the AUD – as it pushes the demand for gold and the AUD up, relative to the GBP.
Central Bank Intervention?
As we’ve mentioned on the OrbitRemit blog before, interest rates drive investment and demand for a currency – the higher the interest rate, the more demand there is, and the higher the price, of a currency. Higher currencies make things difficult for exporters however – as they are effectively getting less AUD for the GBP they’re paid for their exports. The Reserve Bank of Australia (RBA) has recently left interest rates on hold at 2%, despite fears that the AUD, which had been high on the back of a commodity price rally, will become too high to sustain these exports.
Many economists predict that the RBA may cut rates in the future – if this were to happen, it is likely that the AUD will fall against the GBP. Conversely, British interest rates look set to stay stable over the next year.
Inflation, otherwise known as the “erosion of purchasing power”, sits at 1.7% in Australia and 0.3% in the UK. Inflation has a key impact on currency value – as investors are more comfortable in low inflation environments – increasing the demand, and price, of domestic currency. However, both rates are fairly low here, meaning that global fears of deflation need to be considered, particularly in the UK. Deflation – the opposite of inflation, comes off the back of low oil and commodity prices driving down prices on consumer goods. If the UK were to enter deflation, not only would investors reduce their demand for the GBP, this could lead to debt complications (because the real value of existing debts increases even more under deflation). The UK has a lot of borrowers, and if inflation increases the value of this debt, it could spell trouble for the local economy and currency. However, these fears may just be that – fears.
So will the AUD/GBP rise or fall?
Due to it being a web of complicated factors, no-one can say what will happen to the currencies over the short term. For more analysis, you may want to review our 2016 forecast of the AUD/USD here. If you’re looking for the best option for converting AUD to GBP, OrbitRemit has you covered. You can see our rates by clicking on the calculator (it’s at the top right hand side of the screen).