The GBP is struggling – that much we all know. The beleaguered sterling has had a torrid time in the currency market since the Brexit referendum on June 23 2016.
On that fateful day, Britons voted by a margin of 52% to 48% in favour of a break from the European Union. This news spread like wildfire, but nobody expected the GBP to collapse quite as spectacularly as it did. From 1.47 to the greenback, the GBP soon found itself trading at a 31-year low. This sent currency traders into a frenzy of short options on the GBP/AUD pair. As at December 25, 2016, the GBP/AUD currency pair was trading at 1.7095, down 0.15% or AUD $0.003.
For the year-to-date, the GBP is down 15.66% against the AUD, although it has tapered off slightly in recent weeks.
Stretching the Loonie Further with a Weak GBP
Back in Blighty, Britons were not celebrating the demise of their beloved currency. A weaker sterling is a harbinger of more expensive imports. However, this bodes well for UK exports to Europe, Australia and beyond. This was evident in the performance of the FTSE 100 index which rallied as the GBP tanked. Some three quarters of companies listed on the all-share FTSE 100 index are based overseas, and when their earnings are repatriated back to the United Kingdom, they are worth more in GBP. This is precisely why we have seen the 7,000 level being broached and held since the Brexit vote on June 23. On a more practical level, Australians looking to travel abroad to the United Kingdom – England, Wales, Scotland and Ireland – will find that they have plenty more bang for their buck. A holiday that may have cost AU$10,000 back in June 2016 will cost around AU$8,500. That 15.66% currency depreciation certainly works in favour of Aussies looking to live it up in the UK.
Capitalizing on a Declining Housing Market in the UK
The UK housing market has seen a sharp decline in the number of buyers making cash purchases, particularly in the City of London. However, the shortfall in the U.K.’s financial epicentre is being made up in other areas of the country which are seeing an uptick in existing home sales. Australian investors can pick up good deals in the UK market by dint of the current weakness in the GBP/AUD pair. With respect to 2017, whatever happens with the GBP is going to be dependent on what Prime Minister Theresa May does with respect to the Brexit issue. If she decides to invoke Article 50 of the Lisbon Treaty, volatility vis-a-vis the GBP will be affected. A hard Brexit wall cause the sterling to drop further since the uncertainty of a clean break from the EU will create havoc in the markets. A soft Brexit would entail a negotiated series of deals between UK companies and their European counterparts. This would alleviate much of the uncertainty that is currently dragging on the GBP.
Aussie Traders Adopt Contrarian Investment Option
Currency trading is certainly an enticing prospect to Australian traders looking to cash in on GBP weakness. However, the constraints inherent in trading high-risk options with traditional FX brokers is daunting. One option available to Australian currency traders is binary options. The top brokerages now allow traders to open a binary options demo account. This is a zero-risk approach to dabbling in the currency markets without running down your bankroll in the process.
The net short positions on the GBP/AUD pair are likely to continue into the New Year, and safe advice is to take a bearish approach to this pair particularly if UK economic indicators confirm a slight weakening of the economy. Bank of England policy has been solid, and this bodes well for stabilisation. However, the more pressing concern is how European and international companies react to fearmongering in the financial markets. It should be remembered that the GBP was the worst performing G10 currency in 2016; that’s a financial tip you can bank on.