The Australian Dollar backed away from the edge of a precipice on Friday amid an evident improvement in investor sentiment, which turned GBP/AUD away from its year-to-date high set earlier this week.
Australian Dollars were bought widely alongside commodities and other risk assets, taking AUD/USD back above 0.7600 as well as its 100-day moving average at 0.7616, a key rubicon it may need to hold above through the Friday close to sustain upward momentum next week.
Since last November, many assets and exchange rates have been volatile this week, which has helped lift the Pound-Australian Dollar rate to its highest since last November, although strength was ebbing on Friday.
“Our yield differential models suggest USD has become less undervalued against the AUD, GBP, and NZD,” says Lee Hardman, a currency analyst at MUFG. “USD has continued to strengthen over the past week with gains becoming more evident against more growth-sensitive G10 currencies.”
The Pound-Australian Dollar rate was on course to end the week more than 1% higher despite the Sterling coming undone in tandem with the Euro-Dollar rate, which fell as the third wave coronavirus infections prompted further or prolonged restrictions on activity in some countries. GBP/AUD edged back from 2021 high and below 1.81 on Friday but was still above its 200-week moving average at 1.8042, a potentially positive development.
“We recommend going long GBP/AUD,” says Alexis Chassagnade, a strategist at Julius Baer. “Long-term momentum is bottoming around key 1.800 support.”
The Pound has been rising against the Aussie throughout 2021, while the Aussie had fallen against the U.S. Dollar since mid-February when the Reserve Bank of Australia (RBA) began indicating that a desire to lean against currency appreciation may have been a prominent consideration in the bank’s decision to do more quantitative easing.
Assistant RBA Governor Christopher Kent and Governor Philip Lowe subsequently all-but confirmed this was likely the case, creating an implicit threat of further action in the event of another rally in AUD/USD – which has since fallen to a year-to-date loss of nearly -1%.
“Higher bond yields in the US and the perception that the Fed is not yet uncomfortable with this move to have played into the hands of other G10 central bankers. Gains in USD that resulted from the move in US yields have meant currency depreciation elsewhere,” says Jane Foley, head of FX strategy at Rabobank. “The RBA’s commitment to its accommodative monetary policies, bad news on the topic of trade tensions between China and Australia, and a re-think in the market about the degree of hostility in the US-China relationship have all contributed to the move in AUD/USD back to its February low.”
“We expect that the greenback will soften across the board in Q2. Consequently, we see scope for AUD/USD to recover some ground and look for choppy trading in the 0.77/0.78 area on a 3 to the 6-month horizon. We retain our forecast that a combination of accommodative RBA policies and China trade tensions are likely to keep AUD/USD below 0.80 this year,” Foley says.