-GBP/AUD could rise 5% in a Brexit deal rally to top 1.90.

-GBP relief rally would come with AUD under RBA's thumb.

-RBA policy and global virus spread cap AUD in short-term.

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GBP/AUD spot rate at time of publication: 1.8281Bank transfer rates (indicative guide): 1.7644-1.7772Transfer specialist rates (indicative guide): 1.8010-1.8119More information on specialist rates hereThe Pound-to-Australian Dollar rate could rise to a five-month high above 1.90 if a Brexit trade deal is reached over the coming weeks, Commonwealth Bank of Australia suggests, as Sterling enjoys a relief rally and the Reserve Bank of Australia (RBA) keeps the Aussie on its back foot.

Pound Sterling has risen against the Australian Dollar for two consecutive weeks amid ongoing claims of progress in the Brexit trade talks from the London side, leading ‘no deal’ fears to ebb and prompting a rethink among those investors who’d been wagering against the British currency.

“In our view, GBP/USD can lift towards 1.3600 if there is material progress towards an agreement in the next few weeks,” says Kim Mundy, a strategist at Commonwealth Bank of Australia. “We consider AUD has overreacted to the expected RBA policy easing.”

Differences remain between the two sides although those are increasingly reported to be solely in relation to the issue of fisheries access, implying that compromises may already have been reached on more contentious subjects such as state aid and other areas where so-called level playing field commitments were sought by the EU.

There are just less than three weeks until the mid-November deadlinebut with negotiators having stepped back from the brink of failure last week, to have come within arms reach of an agreement in a matter of days, a November trade accord may increasingly be the most likely outcome.

"Whilst last week’s Brexit negotiation developments were tentative they could prove significant, as reflected in Sterling’s solid mid-week rally. It became very clear that even after the ‘brinkmanship’ and threats to walk away, both sides want a deal and the chance of a middle ground being found just when it matters is more likely than ever and could result in an explosive Sterling run," says Joe Tuckey, an analyst at Argentex.

Above:Pound-to-Australian Dollar rate shown at weekly intervals with GBP/USD (black line, left axis).

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A Brexit-inspired GBP/USD rally to 1.36 could lift the Pound-to-Australian Dollar rate as far as 1.9150 if AUD/USD remained around its Tuesday 0.71 level over the coming weeks.

However, the risk is the Aussie falls below 0.70, given faltering risk appetite and the RBA’s current policy bent, which would lift GBP/AUD further still.

RBA policymakers have warned markets they’re actively contemplating how they can better support Australia’s economic recovery and have singled out elevated government bond yields as being a key drive of this year’s rally by the Aussie, which has unnerved the bank due to the impact it could have on inflation and export competitiveness.

AUD/USD was still up +29% from its March low on Tuesday and remained around its highest level since the beginning of 2019, even after falling -3.75% since the beginning of September. But many analysts see the Aussie struggling to regain its lost momentum in the weeks ahead, as the RBA seeks to discourage investors away from the antipodean unit in early November while global markets digest the outcome of next Tuesday’s presidential election.

“The price action in AUDUSD since our most recent update on 23 Sep, when we revised our target lower from 0.7350 to 0.7000 (link), has been rather choppy but overall consistent with our theme of idiosyncratic weakness,” says Alvise Marino, a strategist at Credit Suisse. “With rate cuts and QE expansion now well priced in for the 3 Nov RBA meeting, we see reduced potential for idiosyncratic AUD weakness going forward. We leave our pre-election AUDUSD target unchanged at 0.70. In the aftermath of US elections, we expect AUD price action to follow developments in risky assets more broadly.”

Above:AUD/USD rate shown at daily intervals with AU-U.S. bond yield spread (black line, left axis).

The RBA is widely expected to cut its cash rate to a new low of 0.10% on Tuesday, 03 November - also the day of the U.S. election - as well as its three-year bond yield target although many analysts also expect it’ll announce a new programme of quantitative easing that will be targeted at longer dated government bond yields like the 10-year.

“A$ is headed lower into the ‘Double Header’ RBA/ US Election on November 3, though the stability in G10 FX overnight in the face of steep falls in US equity markets cautions against expecting significant moves here given binary US election risks,” says Richard Franulovich, head of FX strategy at Westpac. “Still see AUD capped by 0.7170/ 0.7200 with a break of that key 0.7010/20 key support level required for a move lower. We still see that coming dip as a good buying opportunity for strength into the end of the year and beyond though.”

Pricing in the overnight-index-swap market implied on Tuesday a November 03 cash rate of 0.05%, indicating the likely rate cut is likely already in the price of the Aussie, although it was still an open question as to whether the effect of its new QE programme has been baked into the currency.

Australia’s 10-year government bond yield had fallen almost -20% from its August 31 high of 1.02% by Tuesday, leaving it at 0.82%, and although a paltry return compared with that offered even in relatively recent history the Aussie 10-year continued to offer the highest return of all major currencies.

Above: Expectations for changes in G10 cash rates, with monthly expectations RBA, Fed in bottom tables. Source: Westpac.

“While history is limited, and conclusions can only be tentative, our analysis suggests AUD/USD is twice as sensitive to bond yield spreads when Australian 10 year yields fall below US 10 year yields,” says Joseph Capurso, a CBA colleague of Mundy’s. "Our $A100bn forecast for RBA QE is less than some other analysts’ forecasts. Consequently, we would not be surprised if AUD/USD enjoys a short term lift after the RBA’s policy meeting next week."

New Zealand’s 10-year, the most comparable benchmark, was around 0.59% Tuesday after months of ‘jawboning’ from a Reserve Bank of New Zealand (RBNZ) that's now expected to cut its cash rate below zero in April 2021.

Anything the RBA does to encourage Aussie yields to more closely match their Kiwi counterparts would turn the Australia-U.S. yield differential more negative and potentially weigh heavier on the Aussie Dollar.

If taking place as a Brexit trade deal comes together in November, this could provide an additional tailwind to the Pound-to-Australian Dollar rate. However, the rising number of coronavirus infections in Europe and renewed tightening of restrictions on activity is threatening the economic recovery on the continent including in the UK, which is a risk that could yet see Sterling come undone.

"Recent data from Europe in particular has shown the pace of the recovery was slowing even before countries began tightening lockdown measures. The Euro may start to come under selling pressure soon as a result," says George Vessey, a currency strategist at Western Union Business Solutions. "Global stocks are sliding as a result as nvestors steer clear of riskier assets in times of heightened uncertainty. Countries where coronavirus cases are falling, mainly in parts of Asian and Australasia haven’t suffered as much in the financial markets space either, which bodes well for their respective currencies."