Sell Pound Sterling Against Australian Dollar this week say RBC Capital Strategists

Foreign exchange strategists with RBC Capital Markets have earmarked the Pound as a victim of further potential Australian Dollar strength in the coming week.

Adam Cole, Chief Currency Strategist with RBC Capital Markets, has such conviction that GBP/AUD is going to fall this week that he has made the view his ‘trade of the week’.

Rationale

The call for a fall in the Pound to Australian Dollar is premised on the tone which will be set by the Reserve Bank of Australia on Monday and the Bank of England on Thursday.

“The forward rates curve in Australia is entirely flat after recent dovish comments, but the hurdle for the market pricing in cuts is far higher than for it repricing for a hike – with or without the RBA’s sanction,” says Cole.

“The RBA may try to talk down the currency, but in the absence of any real threat of rate cuts, this will have little impact,” adds the analyst.

Absent any shift in rate expectations, RBC Capital’s default position remains to buy dips in AUD as the outright yield continues to draw in investors while volatility and global yields remain historically low.

The Bank of England are meanwhile forecast to set a tone that undermines the Pound at their Super-Thursday event.

In the UK, the SONIA (money markets) curve remains skewed toward a relatively near‐term hike and RBC reckon that although it is hard to know what exactly markets are priced for around the MPC announcement, there appears to be a fairly widespread expectation that the Bank will take another step closer to hiking rates with another member voting that way.

“Disappointment in the voting pattern or BoE forecasts would see GBP quickly derated,” says Cole.

The details of the trade see RBC Capital look for a fall to 1.61.

At the time of writing the Pound to Australian Dollar exchange rate is at 1.6465.

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RBA Meeting Ahead - Will the RBA Talk the Aussie Down?

The new month will bring with it an important event for the Aussie Dollar as the RBA meet to give their latest policy meeting.

Markets will be looking for the tone the emerges from the central bank in the absence of any shift in interest rates.

Of particular concern will be the RBA's views on the rapid appreciation in value of the Australian Dollar - we know that the RBA has in the past expressed concern during bouts of AUD strength citing it as a factor that hampers the economy's ability to rebalance away from mining.

However, the prospect of a serious dressing-down of the currency are questionable at this stage as some analysts are quick to point out that the AUD is not actually too expensive in an historical context.

In short, a greater appreciation will likely be required were the RBA to seriously talk to the AUD down and - importantly - convince markets they actually intend to do something about it.

There is also a risk the RBA is forced to nudge its near-term growth forecasts lower. But the longer-term profile is still likely to show an expectation of a return to above-trend growth and within-target inflation.

Regardless, the currency is likely going to remain well supported going forward.

"After the relatively dovish comments from Lowe and Debelle recently, the forward curve in Australia is completely flat so risk around the statement should be limited. We continue to see dips in AUD as buying opportunities as investors are drawn back by outright yield, irrespective of the rate dynamic," says Adam Cole, a currency strategist with RBC Capital Markets.