- AUD downside ahead says Morgan Stanley

- Delta variant poses risks

- Market's pricing for rate hikes too aggressive

- Bank of England to support GBP

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GBP/AUD reference rates at publication:Spot: 1.8640Bank transfer rates (indicative guide): 1.7990-1.8125Money transfer specialist rates (indicative): 1.8480-1.8516More information on securing specialist rates, hereSet up an exchange rate alert, hereThe direction of travel for the Australian Dollar remains negative for now say analysts at Morgan Stanley who are concerned with the "asymmetric" risks posed to the economy posed by the Covid-19 Delta variant.

In a recent research briefing the investment bank also notes the Bank of England to be one of the more 'hawkish' central banks, which could allow the Pound to perform on the crosses, which includes the Pound-to-Australian Dollar exchange rate.

"The RBA may have been a bit more hawkish than expected, but ultimately we think the direction of travel for AUD/USD remains negative for now," says David S. Adams, an analyst with Morgan Stanley.

Morgan Stanley have confirmed to clients they remain sellers of the Australian Dollar against the U.S. Dollar, saying the market is expecting the Reserve Bank of Australia's (RBA) to raise interest rates faster than will prove to be the case.

Foreign currencies are currently keeping one eye on global market conditions and another on what various central banks are doing: the rule of thumb being that when a central bank approaches a rate hike the currency it issues tends to appreciate.

The RBA this month signalled further reductions to its asset purchase programme, a prerequisite to an interest rate rise which has prompted investors to bring forward their expectations of when and how fast the RBA will raise rates.

But Morgan Stanley's expectations for the RBA are at odds with what the market are expecting.

Where Morgan Stanley see two interest rate rises taking place in 2022, market pricing shows investors are now expecting a first interest rate rise in July 2022.

In fact, the market is quite aggressive in that they anticipate two more 25bp rate hikes between mid-2022 and mid-2023.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

Such disconnects create opportunity - particularly if you are of the view the market is wrong - as does Morgan Stanley.

There are a number of reasons why Morgan Stanley believe the RBA won't be rushing into a rate hike, one is a concern that Covid risks to Australia are "asymmetrically-negative" i.e. Australia's zero-covid policy is likely to prove more of a burden to the economy than a benefit going forward.

The view is particularly relevant given the long-running Sydney lockdown, as well as lockdowns in the state of Victoria and now South Australia.

Authorities are fast to crack down on activity when faced with new cases and given that the Delta variant is highly transmissible significant disruptions lie ahead in coming months, something the RBA will surely be required to recognise.

"Low vaccination rates and low levels of previous cases suggest limited immunity to COVID-19 already, and the Delta variant's pace of transmission is concerning," says Adams.

Another potential headwind blowing against the Australian Dollar is the turn in global growth expectations: the Aussie tends to benefit when global growth is on the up, which is likely due to Australia's raw material exports that see strong demand when the global economy is expanding.

"The rotation in the equity market suggests that markets are getting increasingly defensive about the global growth outlook," says Adams, adding:

"The rising impact of the Delta variant may be softening market expectations for the global outlook, particularly in areas where vaccination rates remain low and/or areas where policymakers' reaction functions are relatively conservative, suggesting a higher propensity for lockdowns."

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Meanwhile, Morgan Stanley observe the Bank of England to be "one of the hawkish central banks in the G10."

This means, "GBP could outperform on crosses, versus AUD for example," says Morgan Stanley.

They observe short-term speculators have reduced long Pound Sterling positions via the options market, which means positioning for a rebound in the Pound is becoming cleaner.

Morgan Stanley forecast the Australian-U.S. Dollar exchange rate to be at 0.77 by year-end, 0.76 by the end of March 2022, 0.75 by the end of June 2022 and 0.78 by the end of September 2022.

They forecast the Pound-Dollar exchange rate to be at 1.40, 1.41, 1.41 and 1.42 in the same timeframes.

This implies a cross forecast of 1.8181, 1.8552, 1.88 and 1.82 for the Pound-Australian Dollar exchange rate in the above timeframes.