Pound-Australian Dollar Forecast: We are Bearish says Major UK Bank

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The Australian Dollar will continue to advance in value against the British Pound and U.S. Dollar say foreign exchange analysts at NatWest Markets, the UK high-street lender and investment bank.

In a recent briefing note analysts say the Australian Dollar will remain on a trend of appreciation courtesy of the country's ability to contain the coronavirus which has meant its economy has been able to avoid the collapse in economic activity witnessed in the UK.

"Australia has been effective in controlling/managing the spread of the pandemic with the country now reporting only single digit cases. This has helped the Australian economy in its better than envisaged growth recovery, we expect the country to be a relative outperformer in terms of growth compared to its Western peers which should support further AUD flows," says Paul Robson, Head of G10 FX Strategy at NatWest Markets.

The contrast between the UK and Australia is stark.

A cycle of lockdowns in the UK are likely to dampen the UK's economic growth potential, particularly given the UK government is pointing to evolving variants of covid-19 as a means to justify ongoing and indefinite restrictions.

The production line of new covid variants in the UK and around the world means the UK's vaccination programme might not be an ongoing source of support for the Pound that many assume, particularly in the event that the government fails to fully lift lockdowns.

In addition, Brexit continues to impact negatively on UK exports owing to the reams of non-tariff regulations that have now come into place.

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Warnings have been sounded by the Bank of England over the course of the past 24 hours that the EU is set to lock Britain out of its financial markets by withholding equivalence recognition, a move that will likely harm the country's leading engine of tax revenue.

"Sterling’s recovery could fade later in the year as it becomes more apparent that the agreed deal is weighing on trend growth. Softer productivity trends, deep economic scarring and deteriorating sustainable current account deficit position," says Robson.

The impact of Brexit on financial services activity was laid bare on Thursday when the FT reported London has lost so much share dealing business since the start of the year - when the UK officially exited the single market - that Amsterdam is now the biggest share trading hub in Europe.

"We have a bearish outlook for GBP/AUD," says Robson.

The Pound-to-Australian Dollar (GBP/AUD) has risen over the course of 2021, owing to a broad-based recovery in Sterling that appears to have evolved from a combination of 1) a fast vaccine rollout 2) the Bank of England saying interest rates won't be cut to negative and 3) the erasing of lingering uncertainty related to Brexit.

By contrast the Australian Dollar, which was the second-best performer in G10 during 2020, eased back in tandem with a fall in iron ore prices from their recent peaks.

Above: The GBP/AUD exchange rate has been in decline since April 2020.

Iron ore is Australia's main export and foreign currency earner and a rise in prices driven by Chinese demand helped spur a rally in the value of the Aussie currency during 2020.

The outlook for Chinese industrial production and infrastructure activity will determine demand for Australian raw materials and is therefore likely to influence how the Aussie Dollar performs over coming months,

Despite the recent easing in the prices of iron ore and other commodities, economists at RBS remain constructive on the sector.

"Australia being a major commodities exporter, a pick up in industrial commodity prices like Copper & Iron ore has supported AUD flows. We expect further upside for Copper prices as we expect USD to soften and Chinese demand for commodities remains strong, suggesting further gains for AUD/USD," says Robson.

The Reserve Bank of Australia (RBA) will meanwhile be a key factor in the Australian Dollar's domestic story that will remain on balance supportive.

Analysts at NatWest say the RBA will likely maintain an accommodative stance to underpin the economy, but there is a sense that the additional A$100BN in quantitative easing announced in February will be the last as the central bank looks forward to a period of economic recovery.

"With inflation well below its target range, the RBA continues to maintain an accommodative stance in order to support the growth recovery, and recently extended its bond purchase program by 100 A$ bn beyond April’21. RBA acknowledged the stronger than expected labor market releases and upgraded its growth forecast. Also the recent comments around an appreciating AUD have been benign. This all in combination should be supportive of AUD gains," says Robson.