Sean Callow, analyst at Westpac, points out that AUD has printed 6 month highs against the pound this week even as markets continue to price in further RBA rate cuts to follow up on the June and July moves.

Key Quotes

“The rebound in Australia’s commodity price basket from mid-June lows has reinforced official data showing Australia is recording record trade surpluses despite the ongoing angst over US-China trade tensions.”

“This has shrunk Australia’s current account deficit to near balance, its strongest position since the mid-1970s and in stark contrast to the UK, whose C/A deficit of -5.6%/GDP the BoE drily notes is “large by international standards.”

“Such a backdrop, supported by equity market gains and low volatility, may be encouraging AUD short-covering despite the Australian economy’s sluggish domestic growth and inflation pulse which leaves the door open to another rate cut in coming months.”

“But the steepest GBP decline in recent weeks came after BoE governor Carney took a notably dovish turn, showing particular concern over protectionism. Meanwhile, the seemingly imminent selection of Brexit hardliner Boris Johnson as UK PM reinforces underlying GBP pessimism.”

“We look for further sterling underperformance multi-week to around AUD/GBP 0.5675/0.5700 or GBP/AUD 1.7550/1.7625. Multi-month though, AUD should soften on a range of crosses, including against the pound, so the next few weeks could be its strongest levels for 2019.”

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