AU$ Weakens Against GBP as Chinese Economic Data Overshadows UK Politics

TransferWise content team
01.06.17
3 minute read

The pound exchange rate with the Aussie currency is being boosted by a weaker Australian dollar, despite UK political jitters. Whilst UK election polls caused the rate to tumble to AUS$1.7192 in the previous session, weak Chinese data has since weighed on the Australian dollar pushing the pound rate higher through AUS$1.7400.

UK election polls are showing a further narrowing in the lead for the UK Conservative party leader, Theresa May, with one poll even pointing to a hung parliament – in the case that no group wins a sufficient majority in the election, causing the need to form a coalition government. The extent to which the pound has been reacting to each UK election poll as it’s released is concerning and has injected a large dose of volatility into the pound exchange rates across the board. This is expected to continue as election day approaches on 8th June.

On the other hand, the UK manufacturing pmi is set to offer a distraction from political jitters. This is the first of three releases over the coming days which will give an insight as to how the UK economy performed in May. Manufacturing is a small contributor to the UK economy. However, when combined with the Construction PMI to be released on Friday, the two indicators set expectations for the more closely watched service sector PMI. The service sector contributes to around 80% of the UK economy so fluctuations in growth can be particularly relevant for the pound.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.

Concerns over China put pressure on the Australian Dollar

The Australian dollar has been under pressure recently for two main reasons. Firstly, the price of iron ore has hit its lowest point in 7 months. Secondly, Australia’s main trading partner, China, was downgraded by Moody’s over concerns for its economic outlook. Overnight, Chinese manufacturing data missed analysts’ forecasts and showed the sector’s growth is slowing. Cementing concerns over the outlook for the world’s largest metal consumer. As a result, demand for the so called commodity currency, the Australian dollar, has dived.

What’s the link between China and the Australian dollar?
China is Australia’s principal trading partner and the world’s largest consumer of metals. Commodities, particularly iron ore, make up the bulk of Australian exports. Australian iron ore needs to be purchased using Australian dollars. So, if the demand or expected demand for the iron ore decreases because China’s economy looks like it may be slow, the price of the metal normally lowers in response. Thus, the demand for Australian dollars will also go down, devaluing the currency.

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