The British pound is significantly lower against the Australian dollar on Monday afternoon in reaction to renewed uncertainty around Brexit, as well as a general recovery in markets worst-effected by the coronavirus outbreak.
GBP/AUD was lower by 240 pips (-1.22%) to 1.9494 with a daily price range of 1.947 to 1.972 as of 2pm GMT. The exchange rate had erased half of the big gains made last week by UK lunchtime, leaving the currency pair well down from multi-year highs and below the key 1.95 level.
GBP/AUD – Sterling had risen 3.01% against the Aussie last week
Last week was the 5th straight week of gains. It was interest-rate speculation pushing up the pound while fears around the coronavirus outbreak hit the Australian dollar. For the short term, both factors have gone into reverse.
Fears of a so-called ‘hard Brexit’ have re-emerged in a different form. Although a withdrawal agreement is now in place, it is still possible that the UK would leave the EU without a formal trade arrangement at the end of 2020. The chances of either having no trade agreement or a limited one that will mean a lot of adjustment by British businesses seemed to increase after a speech given by Prime Minister Boris Johnson on Monday.
In his speech on Monday, Boris again stated the UK government desire to have a “Canada-style FTA” with EU. That implies a lot more divergence from EU rules than a closer relationship, for example like Norway has. To have completely frictionless trade, the EU requires countries to follow their rules. It follows that the more a country diverges from their rules and regulations, the more friction in the trade agreement. More friction typically means more red tape and higher costs for businesses, which stifles the amount of trade that gets done.
The Australian dollar
The re-open of Chinese markets after the Lunar Break seems to have taken some of the burden off other Asian markets. While Chinese shares and the yuan were tumbling in value, shares in other regions like Hong Kong were stable and the Australian dollar was bouncing off the 3-month lows made last week.