📝 Chinese Soft Growth Suggests GBP/AUD Above 1.78: Westpac Strategy

The UK economy is clearly more directly exposed than Australia’s to the impact of the war. The BoE forecasts a miserable 0% ‘growth’ pace over the next year, given “the significant adverse impact of the sharp rises in global energy and tradable goods prices on most UK households’ real incomes and many UK companies’ profit margins.”

Australia in stark contrast is a massive net exporter of energy products. Its recent large trade surpluses will only grow. The RBA forecasts GDP growth of around 3% over the next year and inflation above 4% through mid-2023.

Markets are pricing in aggressive RBA tightening, to a cash rate above 2.5% by end-2022. The surge in AU yields has boosted its pickup versus GBP to multi-year highs. This yield support should help AUD/GBP rally to above 0.5800 (GBP/AUD down to 1.72) in Q3 and beyond. But near term, the poor global risk mood including concern over Chinese growth suggests the pair spends some time above GBP/AUD 1.78. - Westpac Strategy