Australian Dollar Squashed amid USD Rebound as Containment On Charts Risks Enduring for Weeks 

- AUD overlooks stellar job data amid widespread USD rebound.
- AU recovers 70% of lost jobs but virus, USD still threaten AUD.
- European, U.S. shutdowns threaten bleak winter for economy.
- EUR losses, USD gains both bad news for AUD/USD outlook. 

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The Australian Dollar fell widely on Thursday amid a rebound in U.S. Dollar exchange rates, but could remain on the back foot for weeks yet resistance bars its path higher on the charts while coronavirus developments keep the negatively correlated greenback from falling to new lows.

Australia's Dollar was down against all major rivals with its steepest loss coming against a resurgent U.S. Dollar followed closely by the Aussie's fall against the safe-haven Swiss Franc, although a Brexit focused Pound Sterling was also notably higher against the antipodean unit. 

A U.S. Dollar rebound, aided by stock markets that were softening in response to expanded curbs on activity in some parts of the U.S. including New York and Los Angeles count, was the dominant theme on Thursday and what prompted the Australian Dollar to ignore a strong October job report. 

"AUD/USD ignored Australia’s stellar jobs report because of broad USD strength," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "The strong increase in people re‑entering the labour force and gaining employment reflects an improvement in economic activity and lower JobSeeker coronavirus supplement payments. Nonetheless, the RBA has made it clear that monetary policy will stay loose for a very long time."

Employment rose by 178.8k in Australia last month, confounding a consensus that had looked for a -27.5 decline in employment, with most of the job creation in the coveted full-time category.

The unemployment rate did not decline however, instead rising 0.1% to 7% following an increase in participation that saw previously discouraged individuals resume their search for work. Official convention is often to only record an individual as unemployed if they are actively seeking work. 

Above: AUD/USD at daily intervals and contained by 100% Fibonacci retracement of 2019 leg lower at 0.7398.

Australia lost more than 800k jobs in April and May but has since recovered 70% of those due to increases of 111k, 114k and 210k in June, July and August. 

"Australia’s coronavirus picture remains very positive, even with SA’s likely brief lockdown in response to a small number of cases. VIC is opening up and encouragingly, jobs were already recovering in Oct," says Sean Callow, a strategist at Westpac. "Vaccine hopes are likely to keep equity markets afloat in the face of brutal Covid numbers. We are neutral on the week with support around 0.7180/00 and rallies capped at 0.7400. But ranges should eventually break on the top side." 

The labour market repair are a positive omen for the domestic economic recovery but one that may not be of much use just yet to the Australian Dollar, which has been stymied in its advance on the greenback by technical resistance near 0.74 on the charts. The commodity-backed Aussie is sensitive to the trajectory of the U.S. Dollar given its impact on resource prices, while all are susceptible to the ebb and flow of global growth expectations that were again and increasingly in doubt on Thursday.

"DXY shorts do not offer great appeal at current levels near the bottom of the range, with the EU Recovery Fund running into implementation delays and ahead of the 8th Dec ECB meeting. But a DXY breakdown at some point still seems very likely," says Richard Franulovich, Westpac's head of FX strategy. 

Europe's major economies are mired in another 'lockdown' while the EU's much-vaunted coronavirus recovery budget has thus far been derailed over contentious conditionality attached to it that would leave East European members in a diplomatic, political, legal and economic bind. The coronavirus resurgence and return of political infighting already risked making an already cold and bleak European winter that bit darker when U.S. cities and states began tightening restrictions this week. 

Above: AUD/USD shown at daily intervals with EUR/USD (blue line, left axis) and Dollar Index (black line, left axis).

The Wall Street Journal noted Kentucky, Minnesota, Wisconsin and Illinois all mandating the closure of restaurants and bars on Thursday while the New York Times detailed local authorities' latest attempts at containing the coronavirus which have seen schools ordered to close again. With the election out of the way there's a danger that more cities and states follow suit, threatening an equally bleak winter for North America if not the global economy itself. 

"Sell DXY into strength around 94 if seen, targeting a break of 92 on a 3-month horizon," Franulovich says 

Franulovich and the Westpac team still anticipate that a coronavirus vaccine - like those touted by Pfizer and Moderna this month - will bolster and support the global economic recovery next year, but are conscious of the risks posed by the deteriorating winter environment in Europe and the U.S. New and prolonged containment measures could stoke further renewed demand for a safe-haven Dollar that remained near multi-year lows on Thursday despite its rebound. 

Westpac forecasts a year-end AUD/USD rate of 0.75 ahead of a move up to 0.76 by March 2021, although any further recovery of the U.S. Dollar would likely deal at least a short-term setback to the Australian Dollar. The antipodean unit has not only a large commodity exposure but also a tight correlation with a Euro-to-Dollar rate that is effectively a U.S. Dollar Index in reverse.

When the Dollar Index rises it's normally at least in part because the Euro has slipped over. The Aussie has followed the single currency, which accounts for 57% of flows measured by the Dollar Index, even more closely in 2020 than in the past so could come under pressure if the Euro proves unable to sustain current levels and the U.S. Dollar Index rises further into year-end as a result. 

Above: AUD/USD shown at weekly intervals with EUR/USD (blue line, left axis) and Fibonacci retracement of 2019 leg lower.

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