This week, the pound suffered its biggest intraday drop since early July after business surveys poured cold water on Britain's economic outlook and interrupted a sharp climb against the Australian dollar into 2023. GBP/AUD has been accompanied by heavy speculative betting on the exchange rate recently.
"You probably want to be short GBP/AUD because extreme positioning happens to coincide with extreme moves in GBP/AUD prices," said Brent Donnelly, CEO of Spectra Markets and a veteran currency trader who spent his career at hedge funds with HSBC, Nomura And so on between global banks.
"But the lag is so long that you don't see much signal unless you look at a year or so. After a year, it's very bearish," he wrote in the am/FX daily macro newsletter on Tuesday.
Sterling was still up more than 15% on the year against the Australian dollar on Thursday after a strong rebound in sterling and a relative underperformance in the Australian dollar. The Australian dollar was weighed down by multiple headwinds including commodity prices and the RBA's interest rate stance.
Joseph Capurso, head of international economics at Commonwealth Bank of Australia, said: "Commodity prices have recently weighed on AUD/USD and NZD/USD. The Asian country is the largest market for Australia and New Zealand's commodity (and services) exports. Largely because the economy there has ground to a halt.”
So far, Asia's recovery from virus restrictions that were phased out late last year has defied high financial market expectations and dampened global demand for commodities, just as central bank monetary policy has increasingly hurt the outlook for the rest of the world. Same.
Australia's international trade relations with Asian countries, combined with the interest rate differential between Australia and other advanced economies, puts the Australian dollar at a disadvantage relative to other currencies. Earlier, the RBA has repeatedly said that its interest rate cycle is coming to an end.
"Markets are pricing in the RBA's cash rate (currently at 4.10 per cent) unchanged in September and peaking at 4.20 per cent next March," said Westpac strategist Sean Callow.
Interest rates in sterling and some other currencies have reached their highest levels since before the 2008 financial crisis, at a time when the RBA has placed a high priority on maintaining post-pandemic job growth and keeping the local economy on track. The RBA is trying to guide inflation back to its 2.5% target.
Alex Loo, a strategist at TD Securities, advocated buying AUD/USD on Wednesday, saying: "While the latest forecast from our macro team is that the RBA has finished raising interest rates, they do see the possibility of another 25 basis point hike before the end of the year. Risk. In contrast, the Australian dollar is one of the cheapest currencies on our dashboard."
Subdued inflation and so far modest wage growth in the labor market are among the factors helping to keep the cash rate at 4.1%, but wage settlements are rising and the outlook for commodity prices may also improve with an eventual recovery in Asian growth.
Each of these examples could lead to a pick-up in Aussie rates, which in turn would be detrimental to GBP/AUD, although the latter also faces risks from the pound, including a gloomy UK economic outlook and a maturing BoE interest rate cycle.
Commonwealth Bank's Capurso said: "We forecast AUD/GBP will maintain its decline for the rest of the year and remain strong around 0.52. The prospect of a rate hike from the Bank of England will still weigh on AUD/GBP."
He added: "We think market expectations for a rate hike from the BoE are too aggressive. While we expect a slowdown in rate hikes from the BoE, its positive impact on AUD/GBP is likely to be overshadowed by the US, UK and several other major markets. The economy is offset by recessionary expectations."
The Bank of England's current interest rate is the third highest in the world, and the UK has long been one of the slowest growing economies in the G10, making the UK somewhat of a canary in the economic coal mine, Another reason why GBP/AUD may already be in an uptrend.
Hence the uproar over Wednesday's S&P Global survey results. The ongoing slump in Britain's manufacturing sector deepened in August, while activity in the vital services sector slowed enough to bring it closer to recession, the findings showed.
Neil Wilson, chief market analyst at Finalto Trading and Markets.com, said: "Meanwhile, Sage reported that UK small business sales fell by a fifth."
In the first half of this year, the British economy maintained positive growth, but close to zero, and the rate of interest rate hikes since December 2021 shows that the risk of economic recession is high.