GBP AUD - FUNDAMENTAL DRIVERS
GBP
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.
2. The Monetary Policy outlook for the BOE
The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact . The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet . Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.
3. The country’s economic developments
Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling to maintain.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
5. CFTC Analysis
Latest CFTC data for the GBP (updated until 17 August) showed a positioning change of -21396 with a net non-commercial position of -16745. The big push lower in positioning means current levels for GBP still look attractive for med-term buyers, especially with the positioning seeing quite a flush lower in the past few weeks. The miss in both retail sales and inflation last week did see some additional pain on the Pound two weeks ago, and this week’s flash PMI’s didn’t help either, but med-term outlook remains bullish and thus positioning attractive at these levels.
AUD
FUNDAMENTAL BIAS: NEUTRAL
1. The country’s economic and health developments
The key factors that have created uncertainty for the med-term outlook for the AUD are [1] The virus situation rising cases prompted new lockdowns with the military being deployed in parts of the country to help reinforce lockdown rules. A Q3 contraction is largely expected and pushed back rate hike expectations to 2023. On the China front, we’re watching Iron Ore prices that have fell over 30% from their 2021 highs with China’s economic slowdown and attempts at reducing emissions by raising steel product tariffs touted as main drivers. As Iron Ore is almost 24% of Australia’s exports and over 80% of that goes to China it’s an important one to keep track of as further downside should negatively impact Australia’s terms of trade. Staying with China, the health of the Chinese economy is still in focus after the PBoC’s recent 0.5% RRR cut. The easing has raised concerns about a bigger-than-expected slowdown and as Australia’s biggest trade partner and the second largest contributor to global GDP it’s an important driver to keep on the radar. Politically, the risk of further tariffs and bans on Australian goods is also something to keep on the radar.
2. The Monetary Policy outlook for the RBA
The RBA surprised markets with their previous meeting by not announcing a delay to their September tapering as most participants had expected. They kept their planned QE tapering of A1bln in place for Sep until mid-Nov where they still plan to decide the future of their QE program. The meeting minutes pressured AUD this week as it showed that the board considered the case for delaying the tapering This was interesting because the bank seemed very content about the economic outlook during their statement. But the minutes showed that a possible delay was on the cards, and if they were already concerned at the meeting the recent escalation should provide even more angst and could still see a delay in the tapering taking place.
3. Developments surrounding the global risk outlook.
As a high-beta currency, AUD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
4. CFTC Analysis
Latest CFTC data for the AUD (updated until 24 August) showed a positioning change of -6233 with a net non-commercial position of -56600. Another big reduction in net-shorts for the AUD, and even though our bias for the AUD remains neutral, the speed of the recent build up in net- short positioning is still looking stretched at 3.02 deviation on a 1-year lookback and a 2.10 deviation on a 6-month lookback, thus watch out for mean reversion squeezes higher on good news.
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.
2. The Monetary Policy outlook for the BOE
The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact . The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet . Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.
3. The country’s economic developments
Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling to maintain.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
5. CFTC Analysis
Latest CFTC data for the GBP (updated until 17 August) showed a positioning change of -21396 with a net non-commercial position of -16745. The big push lower in positioning means current levels for GBP still look attractive for med-term buyers, especially with the positioning seeing quite a flush lower in the past few weeks. The miss in both retail sales and inflation last week did see some additional pain on the Pound two weeks ago, and this week’s flash PMI’s didn’t help either, but med-term outlook remains bullish and thus positioning attractive at these levels.
AUD
FUNDAMENTAL BIAS: NEUTRAL
1. The country’s economic and health developments
The key factors that have created uncertainty for the med-term outlook for the AUD are [1] The virus situation rising cases prompted new lockdowns with the military being deployed in parts of the country to help reinforce lockdown rules. A Q3 contraction is largely expected and pushed back rate hike expectations to 2023. On the China front, we’re watching Iron Ore prices that have fell over 30% from their 2021 highs with China’s economic slowdown and attempts at reducing emissions by raising steel product tariffs touted as main drivers. As Iron Ore is almost 24% of Australia’s exports and over 80% of that goes to China it’s an important one to keep track of as further downside should negatively impact Australia’s terms of trade. Staying with China, the health of the Chinese economy is still in focus after the PBoC’s recent 0.5% RRR cut. The easing has raised concerns about a bigger-than-expected slowdown and as Australia’s biggest trade partner and the second largest contributor to global GDP it’s an important driver to keep on the radar. Politically, the risk of further tariffs and bans on Australian goods is also something to keep on the radar.
2. The Monetary Policy outlook for the RBA
The RBA surprised markets with their previous meeting by not announcing a delay to their September tapering as most participants had expected. They kept their planned QE tapering of A1bln in place for Sep until mid-Nov where they still plan to decide the future of their QE program. The meeting minutes pressured AUD this week as it showed that the board considered the case for delaying the tapering This was interesting because the bank seemed very content about the economic outlook during their statement. But the minutes showed that a possible delay was on the cards, and if they were already concerned at the meeting the recent escalation should provide even more angst and could still see a delay in the tapering taking place.
3. Developments surrounding the global risk outlook.
As a high-beta currency, AUD has benefited from the market's improving risk outlook over recent months as participants moved out of safehavens and into riskier, higher-yielding assets. As a pro-cyclical currency, the AUD enjoyed upside alongside other cyclical assets going into what majority of market participants think was an early post-recession recovery phase. As long as expectations for the global economy remains positive the overall positive outlook for risk sentiment should be supportive for the AUD in the med-term, but the recent short-term jitters and risk off flows once again showed us why risk sentiment is also a very important short-term driver for the currency.
4. CFTC Analysis
Latest CFTC data for the AUD (updated until 24 August) showed a positioning change of -6233 with a net non-commercial position of -56600. Another big reduction in net-shorts for the AUD, and even though our bias for the AUD remains neutral, the speed of the recent build up in net- short positioning is still looking stretched at 3.02 deviation on a 1-year lookback and a 2.10 deviation on a 6-month lookback, thus watch out for mean reversion squeezes higher on good news.
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