- AUD/USD rally bolstered by precious metals, gold claims new record.

- Westpac, CBA, Commerzbank, MUFG tip more gains ahead for AUD.

- January 2019 highs near 0.73 in sight but USD rebound a risk to AUD.

© Taras Vyshnya, Adobe Stock

The Australian Dollar softened against the U.S. Dollar Tuesday but it's increasingly being bolstered by a surge in the prices of commodities including precious metals prices, which some analysts say could lift the antipodean unit to January 2019 highs in the weeks ahead.

Australia's Dollar edged lower alongside other risk currencies in Europe Tuesday but had for a second time risen above the parapet that is the 61.8% Fibonacci retracement of its 2018 downtrend overnight.

This was as gold prices hit new record highs when they rose above $1,920, providing a boost to the Australian terms of trade and current account surplus. Precious metals rose as vaccine hopes competed for investor attention with U.S.-China tensions, second wave coronavirus concerns that have reached Europe and an imminent reduction in fiscal support for U.S. households.

"AUD/USD fell back towards 0.7140 as gold prices lost momentum," says Kim Mundy, a strategist at Commonwealth Bank of Australia. "With international tourism now out of the picture, we estimate that gold is now Australia’s fifth largest export. Therefore the recent appreciation in gold prices, the modest recovery in Brent oil and resilient iron ore prices all reflect an external environment that is positive for AUD."

Global stock markets were given new life on Monday when Moderna said it had begun phase three trials of its coronavirus vaccine. Since then a further two firms have notified the market that their own vaccine candidates have also reached that milestone, raising hopes of a treatment that can curtail the burgeoning pandemic and second waves in some developed markets.

Above: AUD/USD rate shown at weekly intervals with Fibonacci retracements of 2018 downtrend.

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"AUD’s rally to above 0.71 coincides with the MSCI World index reaching highs since Feb, keeping the Aussie’s traditional positive correlation with risk appetite firmly intact. The Aussie’s support is broader than equities however, with commodity prices accelerating in recent weeks, especially iron ore and copper. Westpac’s index of Australia’s commodity export prices is up 21% since late April," says Tim Riddell, a strategist at Westpac.

Westpac forecasts an AUD/USD rate of 0.70 by the end of September but have acknowledged that a soft U.S. Dollar could keep the exchange rate above that level in the short-term. Last week Westpac FX strategists said the Aussie could potentially rise to what would be its highest level since January 2019, near to the 0.73 handle, as a result of weakness in the U.S. Dollar, robust risk appetite and technical factors. Others have concurred with that view.

"AUD/USD remains bid near term and we would allow for gains to the 55 month moving average at .7284, which we would expect to hold the initial test. We have a short term uptrend at .7031 and would tighten profit stops to just below here. Key support is offered by .6778/74," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Jones has been betting on the Aussie since it was last trading at 0.6857 in early July. The Aussie has risen 3.5% this month and by 9% in the last three months.

Above: AUD/USD rate shown at daily intervals with gold price per ounce (orange line).

However, Australia's Dollar is up 30% from its lows in March 2020 following moves that some say indicate a loss of confidence in fiat currencies backed only by the confidence that investors and financial markets have in the central banks which underwrite them.

"We view the developments as reflecting a further loss of confidence in fiat currencies driven by the COVID-19 shock. The expansion of both monetary and fiscal policies in response to COVID-19 has been unprecedented," says Lee Hardman, a currency analyst at MUFG. "The US budget deficit is expected to blow out towards 15-20% of GDP, and the overall euro-zone and Japanese budget deficits to between 10-15% of GDP. In these circumstances, we continue to see scope for further upside for precious metals. The gold price rally following the Global Financial Crisis lasted for almost two and half years."

Hardman says the Australian Dollar and Swiss Franc are best placed to benefit from a loss of confidence in modern money and the resulting higher gold prices but that Switzerland's has the edge because of its safe-haven qualitities. However, the bank has warned of a possible reversal of recent U.S. Dollar selling and a rebound in the American currency that could at least temporarily call time on the Australian Dollar rally.

"The US Dollar was viewed as a safe haven at the start of the pandemic due to its liquidity appeal, but since the unprecedented monetary and fiscal support by central banks globally, financial markets have stabilised. In a world of abundant liquidity, it seems the dollar has lost its safe haven status so amid escalating geopolitical tensions and rising coronavirus cases, the dollar has weakened. The US Dollar index has fallen to 22-month lows, weighed down heavily by the 4-cent rise in EUR/USD in two weeks," says George Vessey, a strategist at Western Union Business Solutions.

Above: AUD/USD rate shown at daily intervals with silver price per ounce (orange line).