As global stock markets began their first trading day of the year, forex trading experts noted that the sudden sell-offs in December are still resonating, as investors are now picking safe haven stocks instead of growth-oriented assets. According to reports, investors are more cautious than they were in Q1 of 2018. Safe haven currencies are now enjoying the attention of buyers, but the Chinese proxy AUD is having a difficult time. However, there is some good news on the horizon, as China is going to continue its infrastructure projects to support its own economy.
Analysis of China’s movement
China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December 2018 fell from 50.2 to 49.7 in November. A lacklustre factory output PMI followed this. Because movements below 50 lead to contraction, investors are worried that the AUD will take another hit. China, of course, is hurting as well, but it likely has plans to ensure that its economy will strengthen, according to analysts.
Apart from the trade war harming economic growth, ING Bank Economist Iris Pang believes that the conflict between the US and China is also negatively affecting export-related supply chain businesses. Domestic demand has taken the brunt, according to reports.
The bank expects the Chinese government to continue with its infrastructure plans, however, as this will boost the local economy. Experts said that this will also help the AUD, as China gets most of its raw materials from Australia.
December’s PMI will likely be lower than the previous month’s, analysts noted, and the Chinese economy should slow down a lbit. It is reflecting the events that have been happening globally, but this will not last very long, according to bankers in Beijing and Shanghai.
Trade tensions between the US and China will also ease in the coming months as both countries realize the repercussions of continuing the trade war, analysts predicted. A middle ground should occur to ensure growth for these nations.
While the outlook for the AUD is looking much better compared to several days ago, the Brexit saga will still affect the currency. The uncertainty in the UK has reduced investor appetite, but once matters are more certain, the general outlook will be determined.
The climactic vote this January will dictate the value of the British pound. At the moment, the pound will maintain its current position, which means that a GBP/AUD pairing is still on the side of the British currency.
Analysts said that votes regarding May’s Brexit deal will reveal all once they are in. Commons will return from its recess on 7th January and will likely vote on May’s proposal the week after.
There are rumours that the EU will be offering a concession to Britain over the backstop. However, experts noted that this is highly unlikely, as the EU is seeking to protect itself and its members. Although recent reports give a more positive outlook for the UK economy and the pound, businesses are still getting ready for a hard Brexit.
The US problem
The biggest problem for the AUD is the trade dispute between China and the US. Although the US. has problems of its own, experts said that trade tensions will subside as both countries find a way to solve this predicament. The US, analysts noted, will have a lot to lose from an opposing scenario considering what is happening in Wall Street.
Despite gains, Wall Street stocks lost more in December, and with the Federal Reserve scheduled to make another adjustment to interest rates, a more serious slowdown will take place. Investors fear that the US will usher in yet another global financial crisis, but whether it will start with Wall Street or not, the chances of a crisis is reportedly quite high.
Lower demand for the AUD
There is a lower demand for the AUD as China’s economy suffers from a slowdown. Because of this, the AUD had the worst performance among major currencies in 2018. Since the market has not yet stabilized, this particular trend will continue in the coming weeks or even months.
The news is not all bad, however, as analyst Patrick Bennett has predicted that the AUD will gain back its losses by the second quarter of this year.
If China does continue its infrastructure projects, then the AUD will have better days ahead, according to reports.
There is no change in the bigger picture regarding the EUR/AUD pairing. The exchange rate rally has continued after a short retreat, reaching as high as 1.6348. The EUR is performing better than other major currencies.