Australian Dollar Hits New High against U.S. Dollar as Strength Curbs GBP/AUD's Recovery

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• GBP/AUD spot rate at time of publication: 1.7745
• Bank transfer rate (indicative guide): 1.7127-1.7251
• FX specialist providers (indicative guide): 1.7482-1.7624
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The Australian Dollar rose as currency markets continued to look on the brighter side of a coronavirus-contaminated outlook on Wednesday, with AUD/USD reaching its highest since April 2018 and in the process helping to constrain GBP/AUD even as Sterling itself outperformed.

The Pound-to-Australian Dollar rate was higher but only by a fraction as the Aussie found almost matching demand among investors who appeared to shrug off another delay of a much-needed fiscal relief package in the U.S. 

Senate Republicans had delayed on Tuesday a vote on the eagerly-awaited as well as overdue aid package for American households, some of whome have faced hardship since enhanced benefits provided by the earlier bipartisan CARES Act expired in the summer. 

The bill provides for $2,000 cheques to be sent to many individuals and although its approval was delayed earlier this week, investors appeared to take the view on Wednesday that it or some derivation is still likely to be endorsed sooner or later. 

"If the economy experiences a strong comeback on a successful rollout of vaccines in coming months, personal spending or pent-up demand could bring a rush of inflationary pressures and with it very negative real interest rates in the US (and a lower US dollar) unless long treasury yields are allowed to rise significantly," says John Hardy, head of FX strategy at Saxo Bank.

The U.S. Dollar was sold widely again on Wednesday while commodity-linked currencies, which are some of the best positioned to benefit from a global economic recovery, were bid higher including the Australian Dollar. 

Above: AUD/USD shown at hourly intervals alongside GBP/AUD (blue).

"While the near-term threats may have risen, we are sticking to our view that risky assets will gain further ground and that the U.S. Dollar will continue to depreciate next year," says Franziska Palmas at Capital Economics. "Our assumption remains that vaccines are effective and allow economic activity to return to normal over the course of next year, at least in developed markets." 

Investors have continued to overlook short-term risks to price-in a robust global economic recovery from mid-2021 and even more so since the advent of coronavirus vaccines now being rolled in Europe, the U.S. and elsewhere.

AUD/USD was near to 0.77 Wednesday and at its highest since April 2018, taking its annual gain to over 9% and a whopping +39% from the 0.5510 nadir of March 19. Following a remarkable turnaround, the Aussie has now risen against all G10 rivals for 2020 with the sole exception of the Swedish Krona.

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"Immunization campaigns in several countries as well as additional US fiscal support have reduced downside risk to the global economy and bode well for general financial market sentiment. This remains a drag for USD, especially against commodity sensitive currencies," says Elias Haddad, a senior FX strategist at Commonwealth Bank of Australia. "China’s December manufacturing PMI is today’s highlight (8:00pm New York). China’s manufacturing PMI increased to 52.1 in November, the highest since September 2017. A further improvement in manufacturing activity will likely push AUD/USD to new cyclical highs." 

Astrazeneca and Oxford University's vaccine was the latest to win approval for use in the UK on Wednesday. 

Above: AUD/USD shown at weekly intervals. 

The Pound-to-Australian Dollar rate was 0.11% higher at 1.7727 on Wednesday as members of parliament prepared to begin voting on the UK-EU trade agreement announced last week, conclusively averting the trade cliffedge that markets had so often feared in the years since the referendum.

Sterling was the best performing major currency for the session although CBA says the removal of immediate risks to the UK's trade with the EU is likely to see it rise further, with GBP/USD tipped to hit 1.37 in the short-term and potentially even 1.40 early next year. This implies further gains ahead for GBP/AUD, which would rise to 1.7845 unless the GBP/USD move was offset by a matching increase in the main Aussie exchange rate AUD/USD. 

"GBP/USD can push on to 1.3750 in the coming days, but wait until 2021 for moves above 1.40. One factor limiting GBP gains is the rapid spread and likely economic impact of COVID in the UK, including the new reported strain," says Gavin Friend, a senior FX strategist at NAB.  "Consistent with our lower USD view, we have forecast GBP/USD moving above 1.40 into 2021 and in our latest FX update we have 1.42 for GBP/USD end Q1, 2021 but EUR/GBP holding a relatively elevated at 0.87. That leaves EUR/USD at 1.24, AUDGBP at 0.54 and NZD/GBP at 0.5070." 

CBA forecasts GBP/AUD will rise to1.8018 before the end of June 2021, although NAB is tipping a stronger performance, with Sterling expected to hit 1.8518 by end-March.

Above: Pound-to-Australian Dollar rate shown at weekly intervals.