Westpac are backing the pound sterling to stage a recovery against Aussie dollar.
Strategists at Australia’s Westpac are backing the British pound to advance against the Australian dollar.
The recommendation comes at a time of stress for the UK currency - GBP/AUD has fallen from a September best at 2.1872 to an October low of 2.0854.
Remember that the GBP to AUD conversion is in a longer-term uptrend with sterling benefiting as the UK economy improves while the Australian dollar has lost ground as a slowdown in China is felt across major commodity exporting nations.
Recent Australian dollar strength is thus a corrective bounce within a longer-term period of deterioration.
The question for us is whether the October low represents a turning point for the sterling / Aussie dollar pair’s recent blip.
According to currency strategist Sean Callow at Westpac the sterling uptrend is set to resume.
“GBP/AUD decline much beyond 2.08 is likely to be hard to sustain. Ongoing increases in supply of key commodities should keep a lid on Australia’s export prices, as should the absence of a sharp reversal in China’s growth momentum,” says Callow.
Any potential gains made by sterling will however likely be limited as the AUD is not expected to suffer too much pressure from domestic data or the related pricing for the RBA cash rate.
“There is scope for more to be priced in terms of BoE tightening but probably not near term. This should leave GBP/AUD around 2.17 multiweek,” says Callow.
Furthermore, it is worth noting that the exchange rate is presently trading around its longer-term average, something that could keep it sticky around current figures.
Westpac note that the 2.05-2.20 range accounts for a hefty 20.2% of daily closes since the 1983 AUD float.
Looking ahead, the all-important movement in the differential between Australian and British interest rates should move in favour of sterling.
Westpac expect Australian rates to be kept on hold through 2015 and indeed 2016.
The RBA is likely to prefer a softer AUD TWI to yet another rate cut.
“But given decelerating global growth and upward pressure on Australian lending rates, risks to this view are tilted towards 1.75%. Markets see a 50% chance of a move by Dec 2015, rising to 100% by Apr 2016,” say Westpac.
The Bank of England is meanwhile forecast to raise interest rates in early 2016, ensuring the GBP continues to benefit from increasing UK yield expectations.
