The Australian Dollar is Exposed to 'Considerable Decline as we Move Towards end-2016'

The outlook for the Pound to Australian Dollar exchange rate remains constructive over the short-term we believe while analysts at BNP Paribas say the Aussie Dollar should struggle over the final weeks of 2016.

GBP/AUD trades at 1.6123 at the time of writing, well below the week's open at 1.6265 but there remain reasons to believe the pair could yet still climb higher.

We had warned recently that the GBP/AUD market was becoming increasingly compressed and that a break was due.

That break-out has since happened and we could expect follow-through momentum to take us higher from here with 1.64 forming the first target.

This is where the pair closed following early-October's flash-crash:

Concerning the fundamental outlook we hear that Sterling could capitalise on its recent strength with BNP Paribas writing to clients telling them to be positioned for further GBP strength.

“Valuations and positioning are becoming increasingly extreme. Our valuation metrics suggest the ‘worst-case’ scenario could already be priced in by the FX market. Therefore, in our view, GBP-buyers should consider taking advantage of sterling’s current very cheap levels,” says Sam Lynton-Brown at BNP Paribas.

However, BNP Paribas also have some interesting observations on the Australian Dollar saying the currency is now pointed lower.

In fact, BNP Paribas’ Natalie Rickard says there is, “scope for a considerable decline as we move towards end-2016.”

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0109▼ -0.26% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9425 - 1.9506
**Independent Specialist	1.9828 - 1.9908 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

To clarify, the decline is likely to be primarily felt in the AUD/USD exchange rate.

However, as is often the case, declines in the headline AUD/USD tend to be beneficial for the EUR/AUD and GBP/AUD.

Of interest to us is one of the reasons why BNP Paribas anticipate a decline in the AUD/USD.

“Our short-term fair value model – suggests that global equities are the key driver of AUDUSD currently. The global equities coefficient stands at 0.78, suggesting a 10% fall in global equities is associated with a near 8% fall in AUDUSD,” says Rickard.

Apparently traditional drivers such as 2-year rates and commodity prices are much less significant.

BNP Paribas believe a December Fed rate hike is likely to weigh on risk appetite and robust global equity markets, putting pressure on AUDUSD.

The market is currently positioned long AUD according to BNP Paribas Positioning Analysis, which puts long AUD positions at a score of +17 (on their scale of +/- 50), thus creating a vulnerability to weaker equities.

BNP Paribas are forecasting AUD/USD at 0.67 by the end of 2016 and 0.65 by the end of 2017.