Pound-to-Australian-Dollar Rate to Hit Post-referendum High this Year says ANZ

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- GBPAUD hold near four-month high, GBP in 1st place in G10.

- GBP/AUD to hit highest since 2016 referendum in 2019 says ANZ.

- As parliament goes for "pragmatic" Brexit and market eschews AUD.

The Pound-to-Australian-Dollar rate continued to hover close to a four-month peak on Friday but there are still better days ahead for the exchange rate, according to analysts at Australia & New Zealand Banking Group (ANZ), who say Sterling will hit a post-referendum high against the Aussie this year. 

Brexit is of course the number one driver of the Pound Sterling outlook at present, while the condition of the global economy, trade relations between China and the U.S. as well as developments in the domestic economy are front and centre for the Aussie. 

Pound Sterling rose to the top of the G10 league table for 2019 this week after Prime Minister Theresa May said she would give MPs in parliament an opportunity to delay Brexit if they reject her proposed exit plan again when it's next put to a vote. 

"Consensus seems to be building in London and Brussels that, should the UK Parliament again reject the agreement, the deadline will need to be extended," says Daniel Been, head of FX research at ANZ. "Expectations that a hard Brexit could be avoided are providing sterling with some support. However, that is not the case with the economy. "

Markets are now betting heavily that the UK's anti-Brexit parliament will delay, if not abandon altogether, the nation's exit from the European Union. However, Prime Minister Theresa May said this week that extending Article 50 will simply kick a "cliff edge" no deal Brexit further down the road.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

Most MPs oppose a no deal Brexit. They say it would be bad for the economy, although it also happens to represent the cleanest possible break the UK could hope to make from the EU, and there is a strong majority among MPs who have been opposed to Brexit from the outset of the debate. 

MPs rejected the EU Withdrawal Agreement by a majority of 230 in January, an all-time record-stting landslide, as more than 400 of the House of Commons' 650 members voted against the plan for a variety of reasons. 

ANZ's Been says that although talk of delay is helping to support the Pound, uncertainty over the shape and timing of the UK's departure is beginning to have an adverse impact on the economy. He notes that house prices have stalled and businesses are cancelling or deferring investments. 

"The BoE is therefore on hold. Whilst an extension to the Brexit deadline would avert a hard Brexit, it does not remove economic uncertainty. That is what is required for the economy to rebound and sterling to appreciate sustainably," Been writes, in ANZ's latest FX outlook. "The GBP’s fate remains very dependent on the path Brexit will take in coming weeks. We err towards a pragmatic resolution to Brexit and modest GBP strength."

Above: Pound-to-U.S.-Dollar rate shown at daily intervals.

Been says the Pound will rise steadily against the U.S. Dollar in 2019, as parliament works its way toward a Brexit settlement, leading the exchange rate to end the year at 1.36. Though he forecasts the Australian Dollar will remain heavy and close to its current levels into 2020 due to market pessimism about the Reserve Bank of Australia (RBA) interest rate trajectory and uncertainty about the global economic outlook. 

Above: AUD/USD rate shown at daily intervals.

"The AUD has failed to rally with the improved global sentiment, while fully pricing in a very bearish view of the Australian economy for the next 12 months," says Been. "There is more potential for another test higher later in the year should the global ducks line up, but it is too early to position for that in an outright sense."

The RBA has held its interest rate at a record low of 1.5% for more than two years now, citing below target inflation as well as an economic outlook that means wage pressures are unlikely to be sufficient enough to lift the consumer price index to within the 2%-to-3% target band.

However, the bank said this month it would cut its interest rate if the economy slows further and the labour market produces a sustained increase in the unemployment rate, before noting that the risks of a rate cut being delivered over the coming quarters are finely balanced with the odds of a hike.

It cited concerns over the impact that house price falls could have on consumer spending, as well as the effect President Donald Trump's trade with China might yet have on business investment, as reasons for thinking risks to the economy are increasing. 

That's left the market betting heavily that the RBA will cut its interest rate later this year, with pricing in the overnight-index-swap market now implying an RBA cash rate of 1.23% for February 04, 2020, which suggests investors see a rate cut within the next 12 months as a certainty. 

"Auction clearance rates in Sydney are showing signs of stability in the Australian housing market. Should that manifest, and in absence of a sharp reversal in the unemployment rate, expectations of a immanent RBA rate cut are likely to be disappointed," Been says.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

Been and the ANZ team say the RBA will not cut its interest rate this year or next. They forecast that, instead of a rate cut, the RBA will hike once into 2021 although it will take the currency market a long time to realise this. The AUD/USD rate will close the year at 0.70 as a result.

The net effect of ANZ's GBP/USD and AUD/USD forecasts is an implied projection for that the Pound-to-Australian-Dollar rate will rise all the way up to 1.94, its highest level since the days immediately before the June 2016 Brexit referendum.

The Pound-to-Aussie is cross rate that is calculated at its most basic level by dividing the GBP/USD rate over the AUD/USD rate. ANZ's forecast implies a gain of more than 6% is likely for the exchange rate this year.  

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