Australian Dollar Can Keep It Up

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The Australian dollar looks poised to extend recent outperformance against the pound.

This, according to foreign exchange analysts at UBS, who say in a new research update that the AUD setup remains constructive:

"Australia's mix of relatively tight monetary and loose fiscal policy appears optimal from the currency perspective and we see AUD as a relative outperformer in the G10 FX space."

And, it's the pound that could absorb much of the outperformance going forward.

"We also remain short GBPAUD as a trade recommendation," say strategists at the investment bank.

The call is paying off: the pound to Australian dollar exchange rate (GBPAUD) is down 2.75% over the past three weeks, and is hovering just above the 2.0100 level at the time of writing.

Bounces have been feeble and given the looming UK budget, the fundamental narrative on sterling is consistent with a break through the 2.0 transpiring in the coming days.

UBS says the most obvious risk for the Aussie currency at this juncture is a major disruption to global stock markets.

This would reflect the Aussie dollar's long-standing high beta to global investor sentiment, which means it rises when stocks rise and falls when they fall.

Global stocks are off recent highs, which has limited AUD's advance this week, although the market weakness looks to be nothing more than that clichéd 'profit taking' episode for the time being.

Yes, there's noise about the Fed skipping a December rate cut, and that the AI boom is a bubble about to pop.

But the bubbles don't pop when everyone is waiting for it to pop.