- AUD closing in on bottom of FX barrel for 2021

- As 'lockdown' troubles economy & bond yields

- RBA policy implications, global risks also at play

- Could see AUD/USD at 0.70, GBP/AUD at 1.94

Image © Neal Jennings, Reproduced under CC licensing.

GBP/AUD reference rates at publication:Spot: 1.8622Bank transfer rates (indicative guide): 1.7970-1.8100Money transfer specialist rates (indicative): 1.8450-1.8492More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Pound-to-Australian Dollar rate was edging higher at the mid-week milestone, aided by an ongoing antipodean underperformance that has got the Aussie closing in on the bottom spot among major currencies for 2021 and which could see GBP/AUD rising to 1.94 in the coming months, according to Commonwealth Bank of Australia.

Australia’s Dollar slipped to the bottom of the major currency barrel on Wednesday and was just two steps away from being the G10 segment’s biggest faller in 2021, which enabled the Pound-to-Australian Dollar rate to lift back above 1.86, placing the Sterling exchange rate within arm’s reach of fourteen month highs seen briefly on Monday.

This was after Australian Bureau of Statistics data revealed a steeper-than-expected fall in the value of sales for the month of June and in a market where the U.S. Dollar was advancing broadly still, which is normally a supportive environment for Sterling when measured against the Australian Dollar.

The Pound-Australian Dollar rate often does well when the U.S. Dollar is rising though has been bolstered in recent weeks by renewed difficulties down under after another outbreak of the coronavirus saw some of Australia’s largest states returned to ‘lockdown.’

“We expect AUD will be more heavily impacted by market participants downgrading the global economic outlook which suggests AUD/GBP can fall. The risk that the RBA does not taper its asset purchases in November is another weight on AUD/GBP. We see a risk AUD/GBP falls to 0.5150 in coming weeks or months (GBP/AUD up to 1.9417),” says Kim Mundy, a strategist at Commonwealth Bank of Australia.

Above: Pound-to-Australian Dollar rate shown at daily intervals alongside AUD/USD.

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Mundy and the CBA team are anticipating further declines for the Australian Dollar, citing risks to the global economic recovery stemming from the continued spread of coronavirus across the globe as well as the possible implications for Reserve Bank of Australia (RBA) monetary policy stemming from the Australian government response to its own outbreak.

They said earlier in the week that this could potentially lead the 10-year Aussie government bond yield to fall from 1.20% to 1% over the coming months, which would push the differential between Aussie and U.S. government bonds further below the zero level it recently crossed over in what would likely be a bearish development for the main Aussie exchange rate AUD/USD.

“South Australia has joined NSW and Victoria by imposing lockdowns. South Australia’s restrictions are particularly stringent and include residents staying within 2.5kms of where they live and a 6pm curfew,” Mundy says.

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CBA forecasts AUD/USD to fall from 0.73 on Wednesday to 0.72 by the end of September but has warned that there’s a risk of the exchange rate falling to 0.70 if Aussie bond yields tumble and the global market environment also deteriorates, which would lift the Pound-to-Australian Dollar rate to 1.94 if the main Sterling pair GBP/USD holds at or above the mid-week session’s 1.36.

Pound-Australian Dollar rate gains would be less if GBP/USD falls further in the interim, as changes in the former always closely reflect the relative performance of AUD/USD and GBP/USD.

“Credible media reports this week are suggesting that the RBA is likely to rethink its proposed QE taper in light of the current lockdowns. The longer the lockdowns continue, the more damage to the economy, and the more likely that the current $5bn per week run-rate will be kept beyond the end of QE2 in a couple of months,” says Richard Franulovich, head of FX strategy at Westpac.

Above: AUD/USD shown at weekly intervals alongside AU 10-year bond yield.

Australian retail sales fell by 1.8% in June despite that month including only a handful of days in which major metropolitan areas were under lock and key, implying that further declines could be likely in the July data.

This and the risk of economic closures and social restrictions disrupting the Australian job market are why many analysts and economists have said they now expect the RBA to reverse June’s decision to pare back its quantitative easing programme.

The RBA announced last month that from September it would buy a lesser A$4BN per week amount of Australian government bonds under its quantitative easing programme, with a review set for November which had cultivated perceptions of there being scope for a further ‘taper’ then.

That, and investor wagers that the bank would lift its 0.10% cash rate some time in the latter half of next year had been widely cited as supporting the Australian Dollar in recent months, so may be set to become a burden for it over the coming weeks.

“We are not locked into any particular path and bond purchases could be scaled up again if economic conditions warrant doing so,” RBA Governor Philip Lowe said in June’s monetary policy press conference.