AUD likely to gain from EUR slowdown

  • By Carole Ann Furman

  • December 19, 2018
  • 1:48 am BST

Europe’s pain has resulted in gains for the Australian dollar, and this will likely continue as the EU grapples with its problems. Traders expect further gains in the event that a speech by China President Xi Jinping hints at cordial trade relations with the United States. The only hurdle for Australia, according to analysts, is the unwillingness of investors to commit to the AUD ahead of the monetary policy meeting on Wednesday.

While top brokers in forex trading constantly change, those with a US focus are waiting for Xi’s remarks, and investors with an EU focus are taking blows based on recent headlines. As the AUD experiences steady climbs, one particular company focused on the EU, IG Group, is reportedly doing well despite it being based in the United Kingdom.

According to IG Group, it has maintained its dominance based on average monthly volumes. The company has topped every quarter since Q4 of 2017 and has shown the same strength up to this year’s Q3.

Marketing and leverage restrictions

Back in August, the European Securities and Markets Authority (ESMA) published new information regarding restrictions for CFD trading. According to reports, this included leverage restrictions as well as marketing restrictions. The new regulations hit trading volumes so hard that even the best-performing companies, including IG Group, suffered. Q3 of 2018 was the lowest quarter for IG Group, but it did manage to have a trading volume of $460bn. Its most lucrative period was in early 2018.

EU brokers felt the blow of the ESMA restrictions, however. FXCM, a UK-based retail forex broker, slipped from a $233bn average monthly trading volume in Q1 of 2018 to $174bn in Q3.

The rise of IC Markets

The regulations introduced in Europe resulted in drastic changes in the forex industry for the region. While Europe’s brokers struggled, those based in Australia experienced better results. Australia’s IC Markets, for example, saw a rise in trading volume in Q4 of 2017 and Q1 of 2018. It ranked behind IG Group and Saxo Bank, according to reports. IC Markets then moved further up the ladder in Q2 and Q3 of 2018, taking away the second spot from Saxo Bank. Its average monthly forex trading volume in Q2 of 2018 was $399bn, while it average for this year’s Q3 average was a whopping $428bn.

Issues around the globe

Many issues are currently taking place in the Eurozone. Italian Deputy Ministers, for example, have reached an accord with Prime Minister Giuseppe Conte regarding their nation’s deficit. French Finance Minister Bruno Le Maire, meanwhile, told reporters that his country’s deficit will lower to 3% from 3.4%.

As inflation reports came out, increased activity from Euro pairs should have taken place, but the results said otherwise. EUR/USD only saw an increase of around 20 pips, and growth was slower than anticipated by the International Monetary Fund. because rate hikes may face a delay in the Eurozone.

In the United States, President Donald Trump tweeted that he does not like rate hikes, but the Federal Reserve will likely announce one by Wednesday 19th December. Trump tweeted: “It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!”

Looking outside of the Eurozone

Retail investors are reportedly looking outside of Europe after previously choosing to fund companies in the region. Some of these investors may be moving to Australian companies. Pepperstone, one of the country’s most popular forex brokers, climbed up the ladder in Q4 of 2017 with an average trading volume of $167bn per month. By the first quarter of 2018, Pepperstone had an average monthly trading volume of $216bn. Based on this example, analysts are now saying that the fall of  EU-focused companies brought about Pepperstone’s rise.

The Australian dollar as a safe haven

Investors looking for a safe haven will contribute to the AUD’s rise, as the currency is seen as a fair-weather currency. This is constructive for investors from Australia with assets overseas because the weaker AUD basically protects the value of said assets. Experts noted, however, that Australia will still suffer blows due to its banks being dependent on financing from Europe.

Warwick J. McKibbin said that the increase in foreigners wanting to buy Australian financial and physical assets will result in higher AUD demand. The AUD is attractive because it has a relatively lower risk, and monetary policy in Australia tends to attract funds coming in from other countries.