It is not surprising that the Australian dollar has underperformed among G10 currencies, s the Covid-19 outbreak has dominated market attention over the past month, with only NZD weaker. Meanwhile the British pound has limited its decline against a dominant USD to about -1%. Sean Callow, Senior Currency Strategist at Westpac Institutional Bank, analyzes the AUD/GBP outlook.
“Markets were divided on the BoE steady decision but we expected the steady 0.75% bank rate, given the post-election surge in UK business confidence and ongoing strength in the labour market.”
“The UK economy will also feel some impact from Covid-19, but not nearly as much as Australia’s, where 78% of exports head to Asia. The RBA’s clear reluctance to cut rates again lends some support to AUD by keeping market pricing for a cut to 0.5% below 50% until May.”
“Also providing some insulation for A$ as Australia’s trade surpluses shrink is an overhang of short A$ positions, implying plenty of bad news is priced in.”
“We expect disappointing Australian growth and unemployment data to force the RBA to resume easing policy, keeping AUD trending lower against the pound, eyeing AUD/GBP 0.50 or GBP/AUD 2.00 multi-week.”