The Pound is a Sell Against the Australian Dollar

Image © Robyn Mac, Adobe Stock

- GBP/AUD rate tipped as a sell at Nordea Markets. 

- Precious metals set for a recovery on Iran tensions.

- AUD positively geared to commodity price increases.

The Pound-to-Australian-Dollar exchange rate has been tipped as a sell by strategists at Nordea Markets, who say the British currency is likely to be an underperformer in a market where precious metals prices are rising and that the Aussie unit should be an outperformer. 

"If commodity prices rebound on a slightly more broad-based basis, then you better buy a truckload of AUD versus GBP before it happens. USD is historically the worst currency to own if Gold rallies (that is by the way NOT the case currently), but GBP is the second worst," says Andreas Steno Larsen, a strategist at Nordea Markets. "AUD is on the other hand high beta to commodity price increases, no matter whether its gold, copper or something third. We consequently like the short GBP/AUD bet."

Gold prices were up 4% for 2020 on Monday and the silver price had risen 3.7% in response to safe-haven demand prompted by the U.S. killing of Iranian General Qassam Soleimani in an airstrike last week, which has drawn threats of retaliation from Tehran and its proxies and sent investors scurrying for cover.

"The combo of renewed geopolitical tensions, a rising oil-price and signs of decent late-cyclical inflation pressures has allowed Gold and Silver to rise despite generally higher interest rates," says Larsen. "A slightly weaker USD could prove to be the final nail in the coffin for the 1550 resistance level in Gold."

....targeted 52 Iranian sites (representing the 52 American hostages taken by Iran many years ago), some at a very high level & important to Iran & the Iranian culture, and those targets, and Iran itself, WILL BE HIT VERY FAST AND VERY HARD. The USA wants no more threats!

— Donald J. Trump (@realDonaldTrump) January 4, 2020

Markets are on high alert for signs of escalation after President Donald Trump said Sunday the U.S. would "strike back, & perhaps in a disproportionate" manner if there are any further attacks American people or property in the Middle East. The warning came after Saturday Twitter posts in which the electioneering leader said Washington has selected 52 sites inside Iran that will be targeted in the event of further attacks on U.S. interests in the region. 

This is after the embassy in Baghdad was attacked by militants that are seen by the U.S. as Iranian 'proxies'. The embassy was said to have been attacked in response to an American missile strike on a local militant group, which killed a number of fighters and was itself a response to an insurgent attack on an American military base that claimed the life of at least one contractor.

Above: Pound-to-Australian-Dollar rate shown at daily intervals. * Time to move your money? | Get industry-leading exchange rates and maximise your currency transfer potential with Global Reach. Speaking to a currency specialist will also help you to capitalise on positive market shifts while protecting against risk. Find out more here. * Advertisement

Nordea Markets is not convinced of "the world is healing narrative" but still see the Australian currency eventually getting the better of its British rival if the gold price continues to rise. The Pound was higher against all its major rivals including the Australian Dollar on Monday while the currency market in general appeared to get over the spike geopolitical tensions much more so than any other asset class, although Nordea sees the upside from here as limited. 

Sterling has historically been an underperformer during times of strength in the gold price although it's not clear that the relationship is causal. In other words, it's unclear that a rising gold price can itself weaken the Pound. But the UK does play host to the London Metal Exchange, which is the world's largest market for futures contracts in precious metals, and the London Bullion Market which is itself the largest over-the-counter trading venue for physical gold in the world. 

"We continue to struggle to see any material further potential in the GBP rally, as e.g. GBP/USD seems to have fully priced in the Brexit by 1st of Feb by now – prediction markets price in >90% chance of Brexit by 1st of Feb," Larsen says. 

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

Pound Sterling has crept higher against most rivals since the Christmas holiday, drawing a line under a downward correction that erased much of the British currency's election-related December gain. But its prospects for 2020 are unclear, with analysts divided in their opinions on whether it will rise or fall in the year ahead. And much about prices action in Sterling as well as the Aussie in the months could depend in the months ahead on appetite for the U.S. Dollar. 

The U.S. Dollar tends to benefit from safe-haven flows in times of risk aversion among investors and the Australian Dollar tends to suffer. And currency traders at least appeared to be close to drawing a line under the spike in tensions between the U.S. and Iran on Monday, with the safe-haven Japanese Yen softening and the U.S. Dollar ceding ground to its Canadian rival, although the Australian unit was down relative to all major counterparts. 

"Soleimani, I think, was in many ways the indispensable man, and with Soleimani dead, it will be very difficult for these proxies to be organized on the scale, lethality, and effectiveness that they had under Soleimani," one high ranking official from the Middle Eastern team told reporters in the press correspondent's room of the State Department Friday. "There were things he could do that nobody else could do. He was not a decentralized manager; he was a hands-on, down-to-the-details manager."

Above: AUD/USD rate shown at 4-hour intervals.

Stock markets were still in retreat Monday and oil prices climbed further as investors in those assets appeared to anticipate at least that tensions will linger.

However, senior officials at the U.S. State Department are briefing the press that the risk of further attacks against U.S. forces, contractors and property in the Middle East is lower than it was before the top military commander was killed. 

"Weakness invites more aggression. Timidity will invite more aggression," the official said when asked why the department no longer expects further attacks. "We’re speaking in a language the regime understands."

All comments made during the briefing were on the condition of anonymity.

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