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Get Ready for Sterling’s “Big Finish”; Australian Dollar at 2-Week Low

Goldman Sachs is backing British MPs to soon find a way through the current political deadlock, after which a “big finish” is expected by the British pound. Meanwhile, pessimism surrounds the Australian and New Zealand dollars, both of which have fallen to multi-week lows.

Posted Apr 02, 2019

“Sterling is maybe the biggest opportunity among developed market exchange rates today,” Goldman Sachs’ head of FX strategy, Zach Pandl, has told Bloomberg.

The pound has weakened to $1.303 since Monday night’s second round of indicative votes, in which all four of the soft-Brexit options put to the UK parliament were again rejected by MPs. The pound had been worth $1.311 prior to the results being announced.

Unlike some others in the market, Goldman’s Pandl doesn’t see the failure to secure a majority on one or more indicative options as a negative; instead, it draws us closer to the end of the current Brexit impasse, after which sterling will rally quickly, he believes.

“We do think we’re making progress despite these failed votes. We’re coming to a big finish here [for GBP].”

Goldman Sachs is the second major US bank in recent days to publicly back the pound.

Britain’s currency is “attractive” at current levels, Morgan Stanley wrote last week, because a soft Brexit (one that ensures a close economic relationship between the UK and EU) is most likely and because, in Morgan’s view, “the risks of a hawkish Bank of England remain underpriced.”

Though the pound is also trading lower against the euro, Canadian dollar, Swiss franc and Japanese yen, it has gained value against the under-pressure Australian and New Zealand dollar currencies, both of which continue to weaken amid a significant repricing of interest rate expectations.

On Tuesday afternoon, the Reserve Bank of Australia appeared to hint at a possible shift to a rate-cutting bias at its next meeting when it appended to the bottom of its statement an unfamiliar sentence: “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

Following the RBA’s announcement, the Australian dollar fell to its lowest level in 2 1/2 weeks, at $0.705. The highly-correlated New Zealand dollar slipped to its weakest level since mid-February, at $0.674.

Many of the big currency forecasters are giving a thumbs down to both the kiwi and Aussie for the near and medium term.

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