GBP/AUD: Opportunity Available

While the ongoing soap opera crisis in Greece grinds on and the impact it will have on the Euro grabs most of the attention in the forex universe, there is a quiet story of economic success brewing on the island nation. A look at the news flow coming from Great Britain since February is positive including a 2.8% growth rate in 2014, stable employment numbers (unemployment has remained low at 5.7% while wages are outpacing the 0% inflation rate), and a Bank of England that has shown a steady hand recently keeping monetary policy consistent and the messaging cool. This combination of rising growth, wages, and relatively cheap money has buoyed the British economy. The same could not however be said 5000 miles away in China where the government is scrambling to stave off slower growth.

China has been using tools and strategies to keep its rapid growth rate in place but so far its not working. Since February, it has lowered the cost of money it loans to banks, cut the reserve rate twice, and yet GDP is at a six-year low. There are many concerns the government is trying to prop up an economy that is overleveraged and in danger of letting inflation run too hot. Inflation ran at 1.4% in February alone with food prices even higher. At some point, the government will have to tighten the money supply to reduce leverage and prevent runaway inflation. China is slowing down and Australia will feel the brunt of its weakness.

Australia’s economic success is tied to China’s thirst for its raw materials. While China will still be growing the slowdown will hurt Australia’s economy and, as a result, its currency. We have already begun to see the impact of Chinese economic softness in rising Australian unemployment and a growing trade deficit. This is only the tip of the iceberg if China is going to slow down significantly which is highly probable. The Aussie dollar is already down against many currencies but this is just the start and its recent rally may be a good entry.

Looking at the daily chart of GBP/AUD we can see the Pound has been rallying against the Aussie since September of 2014 but with each rally up has come a successive selloff. More recently the Aussie has rallied with uncertainty surrounding the British election (scheduled for May 7th) and speculation the Bank of England would cut interest rates in the face of 0% inflation which it choose not to do.

While the election remains close neither party looks to have an outstanding advantage that would radically change the economic landscape this year. Price is saying the same. As you can see on the daily chart, price is now compressing into a triangle which is a classic pattern for indecision and a pressing result. With a rising trend, this triangle is most likely a continuation pattern confirming the bigger picture fundamentals. With the election now in focus and the Bank of England in the rear view mirror, perhaps one number can break this triangle and begin the Pound’s march higher against the Aussie. British preliminary GDP will be released at 4:30ET USA. If the consensus .5% growth is met or exceeded this could be very bullish for the GBP/AUD pair.