- AUD/USD tipped for outperformance at Westpac.

- Global recovery and risk appetite lift commmodity currencies.

- AUD/USD eyeing 0.74 as GBP/AUD struggles with Brexit.

Image © Desiree Caplas, Adobe Stock

GBP/AUD spot rate at time of writing: 1.8197Bank transfer rate (indicative guide): 1.7560-1.7687FX specialist providers (indicative guide): 1.7924-1.8033More information on FX specialist rates hereThe Australian Dollar has been tipped as a buy at Australian lender Westpac who say any dips in the AUD/USD exchange rate are likely to remain shallow, a scenario that is in turn likely to further constrain a Brexit-challenged Pound-Australian Dollar exchange rate.

Australia's Dollar lagged Pound Sterling and the Japanese Yen Friday but advanced against all other major counterparts including the U.S. Dollar as stock markets tracked higher ahead of the weekend, leaving some European benchmarks on course to end the week with high single digit gains.

Risk currencies like the Aussie were lifted early in the week by Pfizer's announcement suggesting its coronavirus vaccine candidate has proven highly effective in trials, with neither renewed lockdowns of some U.S. cities or continued increases in infections in Europe enough to meaningfully derail risk appetite for more than a moment.

The Aussie has traded between 0.70 and 0.73 since Americans appeared to elect Joe Biden of the Democratic Party to assume control of the White House from January 20, offering a reprieve to the Chinese economy and correlated currencies like the Aussie in the process, while also condemning the U.S. Dollar to further declines. But Westpac has told clients that prices around the bottom of that range should be viewed as buying opportunities and used to position for a continued Aussie rally in 2021.

"We would now be looking for dips back towards 0.7180/ 0.7200 as another opportunity to buy," says Richard Franulovich, head of FX strategy at Westpac. "While the prospect of vaccines becoming available into mid next year lifted sentiment strongly earlier in the week, fresh closures/ curfews and stay at home orders in the US and Europe means we are in for a bleak and frustrating winter so gains much above 0.7350 for the A$ should remain capped."

Above: AUD/USD rate shown at hourly intervals alongside S&P 500 index futures.

Australia's Dollar has followed stock markets higher as they ballooned through summer, taking positively correlated currencies with them before being bolstered last week by the outcome of the U.S. election.

A Democrat-led White House combined with a likely divided Cognress leaves a heavier onus on the Federal Reserve (Fed) to support the economic recovery through further quantitative easing, enabled by new money creation that has historically proven to be supportive of stock and bond markets.

"Vaccine hopes will keep V-shaped recovery expectations intact," Franulovich says.

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GBP/AUD Forecasts Q2 2023 Period: Q2 2023 Onwards Details: Consensus institutional forecast targets + max & min targets. Contributors: Citi, Barclays, Morgan Stanley & more Provider: Global Reach Type: Free Download Please Access Here

{wbamp-hide end}{wbamp-show start}{wbamp-show end}Fed policy and prospect of a global recovery backed by the rollout of a vaccine have so-far been able to offset for the Aussie, a burdensome Reserve Bank of Australia (RBA) stance, which became more 'dovish' last week when the RBA cut its cash rate to 0.10% and expanded its quantitative easing programme.

The RBA put aside A$100bn to buy five and ten-year government bonds in a bid to force down their yields as well as borrowing costs in the wider economy, after singling out what were some of the highest yields in the developed world as a source of 2020's unwelcome exchange rate strength.

"Data at the national level has improved since the middle of the year. Indeed we expect a decent bounce in GDP over H2 20," says Gareth Aird, head of Australian economics at Commonwealth Bank of Australia. "There is plenty of evidence creeping into the data that signals strong outcomes next year are more likely than not. As a result we have upwardly revised our profile for GDP in 2021 and by extension we have lowered our profile for the unemployment rate."

Above: AUD/USD rate shown at daily intervals alongside S&P 500 index futures.

RBA bond buying will reduce yields and the attractiveness of the Aussie to investors, but if economists at CBA are right in looking for a sharp Australian economic rebound next year then investors might overlook the headwind for yields as temporary, potentially contributing to continued outperformance by the currency. CBA forecasts AUD/USD will end the year at 0.74, far above Friday's 0.7245 level. However, the Pound-to-Australian Dollar outlook is again hinged on Brexit talks that are now in their final stage.

"The Brexit process has been in a quieter, more technical phase, and that is good news for the prospects of an eventual deal," says Michael Cahill, a G10 FX strategist at Goldman Sachs, which is also a buyer of the Australian Dollar. "That said, the timeline does appear to be slipping somewhat and getting something together before the EU Leaders Summit on 16 November now seems like a stretch, but the European Council Meeting scheduled for 10-11 December, followed by the final plenary session of the European Parliament between 14 December and 17 December, should provide a December backstop if talks extend for even longer. Against this backdrop, we still think there is room for idiosyncratic Sterling outperformance."

Australian Dollar strength and lingering uncertainty about whether the UK and EU will have agreed a trade deal far enough in advance for it to be ratified by the time the Brexit transition ends on December 31 has prevented the Pound-to-Aussie rate lifting far off its September lows in recent weeks. But even if a keenly anticipated agreement is struck, Goldman Sachs forecasts suggest Sterling will still struggle to rise much from Friday's levels.

Commodities are expected by the bank to be key beneficiaries of next year's global economic rebound and U.S. Dollar decline, which are expected to lift AUD/USD to 0.74 in six months and 0.75 before the curtain closes on 2021. The Pound-to-Aussie rate is expected to remain around 1.81 in the months ahead and to only recover as far as 1.84 by the end of 2021 even if a deal is struck with the EU, in part due to the anticipated Australian outperformance.

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