- AUD/USD at highest since April 2019 with more upside seen by Westpac.

- Victoria's 2nd wave surge overlooked as AUD eyes commodities, stocks.

- Rally seen testing RBA's patience, AUD correction tipped by Rabobank.

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The Australian Dollar remained near April 2019 highs Thursday and is seen by Westpac as likely to advance further in the coming weeks, with 18-month highs tipped as possible, although others have cautioned that currency strength could soon test the limits of the Reserve Bank of Australia's (RBA) patience.

Australia's Dollar was trailing major rivals by late morning on Thursday but remained the second best performer for the week after having clocked up 16-month highs in the prior session, with gains in commodities and stock markets having lifted most major antipodean exchange rates.

The AUD/USD rate rose more than 25% from its March lows to this week's highs although weakness in the U.S. Dollar has also been a substantial driver of the 7.7% increase seen since the beginning of June, as the greenback has increasingly been penalised for the effect that a second wave of infections is expected to have on the U.S. recovery.

"The USD bear case continues to sharpen as Europe reaches a major milestone in its fiscal arrangements and US virus cases rebound due to the sun belt virus outbreak," says Richard Franulovich, head of FX strategy at Westpac. "US$ weakness and bounce in both industrial commodities and precious metals suggests a test of resistance at 0.7205/10 and 0.7240, even 0.7295."

Above: Australian Dollar performance against major rivals in five trading days to Thursday. Source: Pound Sterling Live.

Australia's Dollar has been unmoved by its own swelling second wave of infections that returned Victoria and parts of New South Wales to 'lockdown' this month and which has seen the total number of national infections rise from 7,920 on July 01 to 13,302 by Thursday.

A resurgent coronavirus outbreak and related containment measures are expected to constrain the economic recovery in the third-quarter and beyond.

"The divergence in consumer confidence by state in the July Westpac survey seems likely to become more evident in other measures," Franulovich says. "The surge in gold and silver testifies to the loss of confidence in USD, while strength in copper and iron ore suggest A$ remains in favour for now."

This is at the same time as Australian Dollar strength eats away at the country's export competitiveness and pushed the RBA's 1%-to-3% inflation target

RBA Governor Philip Lowe said Tuesday that the Aussie was "broadly aligned with its economic fundamentals,” at a point when AUD/USD was still trading below the 0.70 handle, although it's since risen more than 2% to trade comfortably above the 0.71 handle.

"We remain cautious about the outlook for the AUD on a 3 month view. With one eye on the currency, it is possible that RBA Governor Lowe will use the August 4 RBA meeting to sound a more dovish tone," says Jane Foley, a senior FX strategist at Rabobank.

Above: AUD/USD rate shown at daily intervals.

Lowe appeared to resign himself to the prospect of ongoing Australian Dollar strength in an address to the Anika Foundation Tuesday, where he noted that Aussie interest rates are at their effective lower limit and again ruled out a shift to negative interest rates.

He also ruled out direct intervention in the foreign exchange market, saying "this too is not a direction we need to head in," although he appeared to caveat this stance by noting that intervention is ineffective when "the exchange rate is broadly in line with its economic fundamentals."

"The fact that iron ore prices have been strong has been yet another bullish factor. However, since the initial impact of the covid-19 crisis is widely expected to be disinflationary due to its impact on demand, it is unlikely that the RBA is welcoming the appreciation of the AUD," Foley says.

It's not clear what level AUD/USD would need to rise to in order for the RBA to consider it out of sync with the domestic backdrop although the higher the Aussie does go, the closer it will inevitably come to that point.

Rabobank's Foley looks for the AUD/USD rate to correct lower over the coming months due to a range of factors including the crystalisation of the coronavirus cost for the labour market. She forecasts a fall back to between the 0.67 and 0.68 on a three-month view.

"Inflation and employment are the central focuses. With this in mind, concerns are likely to be building about the potential repercussion on trade from the souring of relations with China," Foley adds. "More broadly, we see the potential for a retrenchment in risk appetite as unemployment increases in the developed world and the looming demand side crisis evolves."

Above: AUD/USD rate shown at weekly intervals.