- AUD recovery at risk says Rabobank

- Oil market collapse to feed back into softer AUD levels

- Chinese economy remains key to AUD outlook

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The Australian Dollar is expected to remain under pressure for the foreseeable future as a global crunch in commodity prices remain the primary driver of the currency, eclipsing the news that the country will lead the world in exiting the covid-19 crisis.

According to analysts at Rabobank, the currency's recent recovery is at risk of reversing as market attention returns to the dire state of the global economy which should disadvantage Australia's sizeable commodities export sector.

The call comes as Australia is due to start lifting restrictions on economic activity over coming weeks, having noted a sharp decline in new covid-19 cases while the death toll from the virus has only reached 79.

An increase in Australian economic activity, while the U.S. and Europe ultimately remain locked down, could offer support for the Australian Dollar relative to the likes of the U.S. Dollar, Euro and Pound Sterling.

However, analysts at Rabobank say the Australian Dollar's outlook will ultimately be tied to the fate of the global economy Chinese demand trends for Australia's exports, which are tipped to remain subdued.

The slump in the global economy has over the past 48 hours been clearly highlighted by the slump in oil prices, which has seen benchmarks like Brent crude fall to fresh 18 year lows amidst a collapse in demand from a shuttered world economy.

"Historically, Australia’s large coal exports have linked the value of the AUD with the oil price. Not only has coal historically been viewed as a substitute good for oil, but commodities such as oil, coal, iron ore and copper can all be considered as gauges of global demand," says Jane Foley, Senior FX Strategist at Rabobank.

According to the latest Australian government export figures that cover 2018-2019, iron ore accounts for 16% of Australia's export basket, while coal accounts for 15% and natural gas for 10%.

These three commodities alone account for a sizeable 40% of Australia's foreign currency earnings - but if we add crude oil, gold, aluminium and copper the commodity sector tips 50% of Australia's export basket, which explains its sizeable impact on the Australian Dollar's valuations.

As long as the world economy is struggling, demand for Australian raw exports will likely remain subdued and this will have knock-on implications for the currency.

"Given this backdrop, it is difficult to be optimistic about the outlook for the AUD, despite the country’s success to date in combatting the spread of COVID-19," says Foley.

How long Chinese demand takes to recover will be crucial for the Australian Dollar's outlook, and by all accounts the recovery should be slow. The Chinese economy contracted 6.8% year on year in the first quarter due to the nationwide lockdowns aimed at stemming the spread of covid-19.

"While there are signs that the Chinese economy has started the process towards normalisation, data such as electricity usage and public transport use suggests that activity remains piecemeal," says Foley.

For 2020, the IMF has predicted that China’s economy may only expand by 1.2%.

Howie Lee, an economist at OCBC in Singapore says the Chinese economy should start picking up some momentum in the second half of 2020, a call that if correct could also have implications for the Aussie Dollar which might see a more sustainable turnaround at this point.

"Macro indicators such as industrial production and retail sales suggest China is slowly inching back to economic normalcy. Chinese commodity indicators, ranging from energy to industrial metals, also show that production is gradually picking up. If China can sustain this momentum, it will likely provide the impetus for global recovery in H2 2020," says Lee.

While the challenges facing Australia's export sector are large, there is also the question of the Reserve Bank of Australia to consider.

The RBA has already slashed rates to 0.25% while also commencing a money printing programme aimed at keeping the yield paid on Australia sovereign debt low.

The Australian Dollar has over recent years found support from incoming international capital as investors sought out the superior interest rates on offer in Australia.

By cutting rates another leg of support for the currency is removed.

"Although the RBA has managed to tone down the size of its weekly bond purchases already, this is a policy that is set to remain in place for some time and low rates will remain in place for even longer. We see risk on another dip below AUD/USD0.60 on a 1 to 3 month view," says Foley.

At the time of writing the Australian Dollar-U.S. Dollar exchange rate is quoted at 0.6322, the Pound-to-Australian Dollar exchange rate at 1.9480 and the Euro-Australian Dollar exchange rate at 1.7184.

"From my point of view, the AUD is a bit overvalued at the moment, particularly against the backdrop of a still paralysed global economy and significantly depressed commodity markets," says Marc-André Fongern at Fongern Global Forex.