Australian and Canadian Dollars fall against Pound as China's policy costs dear

As this week begins, yet another strengthening is very apparent for the British Pound against two major currencies, those being the Canadian Dollar and the Australian Dollar.

The Pound has been doing very well against all of its peers recently, largely because of the inability of the British government to do what the public and investing community expected it to do this winter, and lock down the nation again.

There is a theory among many people across Europe that Britain would have followed the actions of its mainland European neighbours and inflicted a lockdown on its population and that it was possibly already being planned for months in advance, however the wheels came off when the revelations about a number of government officials having had one or more informal gatherings during the period in which they were insisting on compliance with lockdowns.

This has angered a large proportion of citizens and business owners who had not been allowed to operate during that particular period, whereas the government officials having the alleged parties were not afraid of anything, nor were abiding by the strict rules they doled out.

As a result, it would have been impossible to implement any further restrictions on anyone in Britain, therefore the pleasant surprise came when Prime Minister Boris Johnson announced that there would be a complete removal of all remaining restrictions, and Britain is now open and free.

The same cannot be said for many other parts of the world, and whilst the British Pound continues to climb against all other major currencies, it is the Canadian Dollar and Australian Dollar that are falling against the currency of the most free nation in the West at the moment.

This is because not only do restrictions still exist in Canada and are in full swing in Australia, but the two currencies are commodity-reliant, whereas the British Pound is not.

Why is that important?

It is important because the already heavily restricted nations of Canada and Australia are dependent on the large commodity trading centers of Toronto and Sydney, and both of those commodity centers are part of a massive trade union with China.

China at the moment is instigating a 'zero-Covid' policy across its mainland, which is a media-friendly term for total control over every activity and draconian restrictions on movement and business.

In Canada, the analysts are stating their case for the reason why the Canadian Dollar has dipped, with Bank of Montreal Capital Markets' European Head of FX Strategy Stephen Gallo having told CNBC that ripple effects from China could be feeding into the performance of developed market commodity-based currencies.

Yes, consumable commodities such as oil and gas have risen in price during recent months, but there are other areas of the commodity market that have had an effect on commodity-dependent currencies.

The very same bank's Head of FX Strategy Greg Anderson stated that the two-year swap rates for Australian and New Zealand dollars had underperformed the U.S. dollar, which would perhaps indicate toward a theory that central bank policy divergence is a factor.

However, the Canadian swap rate has performed very similarly to the U.S., so this does not explain why CAD has not rallied alongside oil, according to the analyst.

In China, there were closures of factories along with electricity power cuts last year as part of the strict restrictions on people's movement in China, and it is known that the country is operating a 'zero-Covid' policy and such a policy is likely to have severe implications for both supply and demand and in particular it could conceivably be affecting China’s demand for certain raw materials.

By contrast, the British economy is more reliant on international investment, its own diversified industry base and the financial markets center in London which also has a vast equities trading contingent on the London Stock Exchange and is not so dependent on raw materials or commodities.

The British Pound starts the trading week at a five-day high against the Australian Dollar, at a value of 1.89 Australian Dollars to the Pound, and it had held a high point against the Canadian Dollar during the off-market hours at the weekend at 1.7 Canadian Dollars to the Pound, before dropping slightly this morning.

There is a crossroads in the currency market at the moment, that being the buoyancy of the majors that are sovereign currencies of nations with no lockdowns or restrictions and a diversified local industry base, compared to the flagging values of those reliant on trade with China, have high commodities dependency and have a myriad of restrictions still in force.

It's certainly a different world this January to that of even one year ago.