FxWirePro: GBP/AUD Gains Momentum But Is It Momentary? Deploy Directional Hedges

GBP has gained support from progress in trade talks with the EU in July, even though the two parties remain far apart. GBPAUD has gained almost 1.29% so far in this month, the pair has continued yesterday’s marginal gains from 1.8080 to the current 1.8192 levels.

On the positive side, the EU has agreed to an arbitration process for dispute resolution following earlier hints at a willingness to explore a softer stance on state aid rules and possibly fisheries. The UK, meanwhile, has conceded to one overall agreement rather than various sectoral agreements and has also committed to remaining in the European convention on human rights. However, there hasn’t been any notable progress on level playing field arrangements and on fisheries. Domestically, fiscal policy is modestly expansionary in the UK. We expect the additional fiscal support of GBP30bn (1.5% of GDP) outlined in July to be added to the Autumn budget. Record low gilt yields indicate no funding stress, in contrast to the sell-off in March.

BoE and RBA are scheduled for their monetary policies for the next week; today's BoE bank lending figures confirmed a further sizeable increase in borrowing by SMEs in June. In particular, such borrowing was up £10.2bn, having leapt £18.2bn in May - compared with the previous largest net increase of £589mn - to see the annual growth rate rise 5.6ppts to a record-17.4%Y/Y.

Australia’s commodity export prices is up 21% since late April, reinforcing Australia’s current account surplus. Australia’s renewed Covid-19 containment challenge is a potential brake on gains, however. While the RBA does not favour either negative rates or FX intervention, the weakening domestic economic outlook could raise expectations that the RBA might take other steps to loosen policy to support the labour market, where unemployment is still rising.

While the composition of AUD debt issuance has changed sharply in 2020. Federal and state governments are issuing unprecedented amounts to fund large fiscal stimulus packages as revenues fall.

We have turned modestly positive in GBP through 2021. We see a gradual appreciation path for the currency, with GBPAUD ending this year at 1. 7175 before heading to 2.08 by end H1-2021. Hence, contemplating the puzzling swings, we’ve advocated below strategies to arrest both bullish and bearish risks as per the minor and the major trends.

Hence, on hedging grounds, we’ve advocated initiating longs in GBPAUD futures contracts of August’2020 delivery as further upside risks are foreseen in the short-run and simultaneously, shorts in futures of September’2020 delivery.

Thereby, the foreign traders, who are dubious about puzzling swings, can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately. Courtesy: Westpac & ANZ