AUD vs GBP: Sterling outperformance likely near an end - Westpac

Sean Callow, Research Analyst at Westpac, notes that the sterling has been the strongest G10 currency over the past month by a considerable margin, even rising against the resurgent US dollar.

Key Quotes

“A degree of encouragement in UK economic data and the Bank of England’s switch from an easing bias to neutral have fuelled partial covering of very large short GBP positions.”

“But we suspect this period of sterling outperformance is coming to an end. In the next few weeks, European politics will start to draw increased market attention after the recent fixation with the US elections. In Dec, the UK government will appeal the ruling that Brexit needs to be voted on in Parliament. The renewed debate is unlikely to support UK confidence.”

“AUD has been close to the weakest G10 currency since the US election, with long positions squeezed by the surge in US yields and attendant rout of Asian FX.”

“But with key commodity prices holding higher for longer, the RBA firmly on hold into 2017 and the rise in US yields arguably excessive, AUD/USD should become more stable in the weeks ahead. This should see AUD/GBP recover to around 0.6150, GBP/AUD slip back to 1.6250.”