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Australian Dollar Rally Taking a "Pause for Breath" says CBA

- Pause button hit on AUD's 2020 recovery
- Substantial decline in AUD unlikely says CBA
- Covid-19 lockdowns in Aus and U.S. to remain localised

Aussie Dollar

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Foreign exchange analysts at Commonwealth Bank of Australia say the Australian Dollar is due a "pause for breath" from its multi-week trend of appreciation, amidst "surging coronavirus cases in the U.S. and elsewhere", but ultimately the outlook for the currency remains constructive.

In a note detailing the Australian Dollar's outlook, CBA strategist Kim Mundy says "the ride is not over for the AUD yet. The recent AUD consolidation is just a pause for breath".

The Australian Dollar-U.S. Dollar exchange has advanced from a low of 0.5509 on March 19 - the height of the covid-19 market meltdown - to a best of 0.7064 reached on June 08, before entering a pattern of consolidation that has meant it has largely tracked sideways over the past month and is currently quoted at 0.6976.

AUD rally

Above: The AUD's rally fades

The consolidation in AUD/USD has meanwhile slowed the Aussie Dollar's ascent against other currencies: the Pound-to-Australian Dollar exchange rate has over recent weeks fallen from a high of 2.0852 on March 19 to a low of 1.7868 on June 30 and while the trend still favours the Aussie, the pace of decline has been blunted.

Consolidation in GBPAUD

Above: GBP/AUD's recent consolidation in context of the broader decline

The question therefore is how long this pause in the AUD's trend of appreciation will last?

Mundy says AUD/USD can fall back to 0.6660 in the near-term as market nerves rise over the rise of covid-19 cases in the U.S., ensuring renewed lockdowns would slow down the recovery in the world's largest economy which bodes for underperformance in stock markets and commodities which are both crucial drivers of Aussie Dollar value.

The emergence of covid-19 hot spots in Melbourne meanwhile poses an additional headwind to the Australian Dollar as the country's exit from lockdown restrictions will be questioned. The state of Victoria recorded 108 new cases on Saturday, its second-biggest daily increase.

Localised lockdowns have been initiated to try and spread the disease, meaning ultimately the situation remains contained and that any future outbreaks would be handled in the same manner. In short, state-wide or national lockdowns would require a significant bar of infections to be crossed before being enacted.

The same goes for the U.S. where individual states are dealing with outbreaks as they see fit, confirming to markets that a countrywide lockdown is unlikely.

This all suggests the bar to a major impulse of selling in stock markets - and by extension the Australian Dollar - remains high.

"We believe it will take a larger catalyst to push AUD/USD back towards 0.60," says Mundy. "The catalyst would be a country-wide, rather than localised, lockdowns in the U.S."

CBA believe there is a high hurdle to implementing widespread lockdowns, "policymakers know the economic toll of turning an economy off is very high. The high costs of lockdowns have made policymakers reach for local restrictions rather than widespread restrictions," says Mundy.

Beyond the covid-19 driver, CBA believe the fundamental backdrop remains supportive of the Aussie Dollar and they expect AUD/USD to lift to 0.7200 by year-end.

"Australia's commodity price outlook is supportive for AUD," says Mundy, adding, "the ongoing recovery in the global economy will weigh on USD."

AUD fundamentals

Image courtesy of CBA


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