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GBP/AUD seen at 2.18 in three months - UBS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 3, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Córdoba) - UBS team are opening a short-term opportunistic trade recommendation to be long GBP versus short the AUD at the current spot of 2.05. This trade has the same target as their three-month forecast of GBPAUD 2.18. The stop-loss is at 1.99. “The GBP/AUD has fallen rapidly from a high of 2.23 in mid-2016 to as low as 2.00 last week, before consolidating at current levels. We expect most of this fall to be reversed”, said UBS.

    Key Quotes

    “On the UK side, two main factors have weakened the currency in recent weeks. First, slightly weaker economic data and lower inflation expectations. Second, the EU Referendum and concerns around a possible BREXIT has come more into focus. As a result of this, market pricing for the first rate hike by the Bank of England has moved into the second half of 2017. This is in our view an overreaction”.

    “The fundamental strength of the UK economy with, for example, the unemployment rate close to pre-crisis levels, points to tighter monetary policy sooner than markets currently think. There are likely to be some forecast revisions in tomorrow's Bank of England Inflation Report, however, we expect some push-back against current market expectations for rate hikes end 2017, which should lead to some re-evaluation by the markets.”

    “The release of a draft deal for the UK by the European Commission (EC) President, Donald Tusk, in our view increases the likelihood of an agreement at the EC meeting on 18 February. If a deal is struck, a referendum could take place as early as 23 June. Our base case is that the UK votes to "remain"; with the referendum out of the way, the chances for rate hikes much earlier than end 2017 should increase, further supporting sterling from current levels.”

    “The Australian picture remains structurally different to that of the UK. While the Australian dollar has fallen 35% from its peak in mid-2011, the domestic economy still faces a long adjustment process ahead in the wake of a weaker Chinese economy, which itself is make significant adjustments. We see this as ongoing for some time yet. Adding the external headwinds, domestic income growth remains tepid and the Government balance sheet continues to deteriorate alongside poor commodity prices. We acknowledge the housing market looks sound, although cooling, and the labor market conditions have been better than expected. Nevertheless, the Reserve Bank of Australia is faced with poor investment indicators and pressure on core inflation due to excess capacity, which has now fallen to the bottom of its 2-3% target. We see it retaining an easing bias in the months ahead, and accordingly expect the Australian dollar to fall further.”
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