GBP/AUD: Scope for test of 1.94 in coming weeks

Sean Callow, analyst at Westpac, notes that the UK PM Boris Johnson appears to have switched from Brexit by end-October “do or die” to going all-in on his plan.

Key Quotes

“Considerable doubt over this plan and an early election remains at time of writing but the key positive for markets is the sharp reduction in the risk of a no-deal or “hard” Brexit.”

“This is a more benign outlook than we had been expecting, so we have revised our sterling forecasts sharply higher, with a new baseline view of GBP/USD tracking the low 1.30s well into 2020. As such, we see AUD extending losses against the pound in coming weeks and months.”

“Our AUD/USD view is unchanged, with a year-end target of 0.67. Lending some support is our view that the RBA keeps the cash rate steady until Feb 2020, whereas pricing for another cut by Dec 2019 is around 50%. Yet this is only a minor reprieve for A$, as 2 year AU-GB spreads continue to tumble and the RBA and BoE respective benchmark rates are already both 0.75%.”

“Commodity prices should hold up long enough for Australia to print some more large trade surpluses, but these have not prevented sustained A$ TWI weakness this year. Potential disappointment over US-China trade talks would also weigh on AUD crosses.”

“So long as the UK government remains focused on passing an EU-approved Brexit deal by Jan 2020, GBP should continue to outperform AUD, with scope for AUD/GBP 0.5150 or GBP/AUD 1.94 in coming weeks.”

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