Citi Trade of the Week: Long GBP/AUD

Long GBPAUD

Our weekly trades will provide short term guidance on where we see 1-2 week opportunities in G10 FX markets. Unless we explicitly extend them, they will close out automatically at COB the second Friday after they are introduced.

Trade Idea: Buy GBPAUD at 1.8522, targeting 1.88 with a stop at 1.82.

Our view:

AUD could underperform further in the face of weakening global growth expectations, tighter financial conditions associated with US outperformance and more China-centric concerns despite better trade data this morning. Heading into the fourth plenum, indications policymakers remain unperturbed by weakening momentum on the growth and money side represents an AUD risk.·

GBP could pull back some ground irrespective of the broader risk environment given the shift in market expectations over the past month. Tomorrow CPI figures is expected to moderate somewhat although focus should remain on Wednesday’s labor market data ahead of the November inflation report. Citi economists expect unemployment to slip to 5.9% and average weekly earnings to rise to 0.9%, both above consensus.·

Australian domestic data doesn’t look all that good either. As shown in the chart below full time jobs have lagged the climb in the headline index. The AUD curve is relatively flat out to Q1-15. Further progress on the macroprudential front could also see markets moderate rate expectations further.·

More anecdotal evidence would suggest investors are not all that short AUD. Given the scale of position adjustment seen in UK rates and FX, investors could be quick to cut any GBP shorts in favor of outright longs should wage figures improve as we expect.

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