- AUD to remain fragile, warns Westapc, is vulnerable to losses.

- As oil prices and social distancing threaten a lengthy downturn.

- Westpac and MUFG both sellers of AUD on feeble risk appetite.

- GBP/AUD unwinds coronavirus gains but may fall further ahead.

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- GBP/AUD spot at time of writing: 1.9614

- Bank transfer rates (indicative): 1.8925-1.9062

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Australian Dollar rallies will remain fragile and leave the antipodean currency vulnerable to fresh losses, Westpac says, because lower oil prices threaten liquefied natural gas incomes while continued social distancing could do harm to the economy long after the coronavirus has been contained.

The Aussie rallied alongside risk assets like stocks and oil Thursday, placing the Pound-Australian Dollar rate under fresh pressure, but the upside is limited and the downside large and heavier with every day the coronavirus crisis keeps the global economy in 'lockdown'. Thursday's price action furthers a weeks-long recovery for the Aussie that's been buttressed by sustained falls in the number of new coronavirus infections detected each day through April.

"The A$ isn’t traditionally seen as being at much risk from low oil prices given that Australia is a net importer of crude. But LNG is now our #3 export and its price is tied to oil. Moreover, coal prices are being dragged down by the oil rout. Iron ore is proving resilient but the other 2 exports in Australia’s top 5 are education and tourism, which face an incredibly difficult year," says Sean Callow, a Sydney-based strategist at Westpac.

North American oil futures prices turned negative ahead of expiry this week and in the process revealed the extent of damage done to the energy market by efforts to contain the coronavirus, which have seen demand fall off the edge of a cliff while the barrels keep coming in thick and fast. That's driven an increase in storage prices that's exacerbated a supply glut and magnified the downside for barrels bought, paid for and delivered in the here and now.

Above: AUD/USD rate shown at daily intervals with Fibonacci retracements of 2020 downtrend.

The importance of oil prices to the Australian economy is often underappreciated but they're a key influence on the price of the liquefied natural gas that is an increasingly promiment contributor to the Australian export basket, which means collapsing oil prices should matter to the Australian Dollar. Lower prices can reduce the 'terms of trade' ratio of export prices to import prices and thereby, a part of the perceived value of the antipodean currency.

"Australia’s Covid-19 trends remain encouraging, with just 7 new cases yesterday and 74 total deaths. But tight restrictions on a range of domestic activities are likely to remain at least for weeks and border restrictions will remain for much longer, crushing tourism and education and slowing population growth substantially into 2021," Callow warns.

With large parts of the global economy set to remain in 'lockdown' for weeks if-not months yet, oil prices could fall toward or below zero again as the expiry of the June futures contracts draws closer in late May, which might undermine the Aussie. Westpac said Thursday "there is more to come, as oil reserves soar," and has tipped the AUD/USD rate for a return to the 0.60-0.62 range.

The bank also sees a risk of stock and other commodity markets coming undone again in the weeks and months ahead as the global economy remains on life support, possibly depriving the Aussie of any continued reward for Australian success in curtailing the spread of coronavirus. The Aussie has a positive correlation with stock markets that might have gotten ahead of themselves in recent weeks.

Above: New coronavirus infections declared each day in Australia. Source: Worldometer.

"The turnaround and the notable falls in COVID-19 infections have helped drive AUD higher but gains based on COVID-19 can’t be sustained given this is a global problem and until there is a notable improvement globally, currencies with a global exposure like AUD will suffer," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG, who tipped the AUD/USD rate as a sell around 0.6360 last Friday. MUFG is looking for 0.61.

Australia was among the first to implement travel restrictions after the world's second largest economy placed Wuhan City into 'lockdown' and acknowledged that it had a serious problem on its hands back in January. The antipodean country has since made solid progress in curtailing its own outbreak.

Meanwhile, the Reserve Bank of Australia (RBA) has cut its cash rate to 0.25% and for the first time dabbled with a yield and currency-crushing quantitative easing programme but the bank has also quickly curtailed its interventions in the bond market, reducing the scale of its daily purchases from A$5bn in March to around A$500mn this week. That alone is a significant fundamental relief for the Aussie, which came alongside an ongoing rally in stock markets.

Stocks have rebounded the world over in an April rally that was egged on by plans from the U.S., Germany and some European economies to begin easing lockdown restrictions. The equity market rally has put further wind in the Aussie's sails but the plans are only for a very gradual return to normal and many other economies both small and large are yet to even begin contemplating a return to normal, which could leave the Aussie and its stock market friends vulnerable to disappointment.

Above: Pound-Australian Dollar rate shown at weekly intervals with Fibonacci retracements of 2016 downtrend.

"The UK appears to be caught in a double whammy. On the one hand, a less developed exit strategy than many other developed economies and question marks over its eventual execution, and on the other an economy that is highly exposed from a sectoral perspective to lockdowns. This should ultimately translate into a relatively harder hit to growth and, on a structural basis, be bearish for GBP," warns Oliver Harvey, a macro strategist at Deutsche Bank.

Any tempering of investor optimism over the likely pace of the post-coronavirus global economic recovery might weigh on the AUD/USD rate but one place where the Aussie could find itself in a sweet spot is relative to Pound Sterling, which might need to pick up the tab in the days and weeks ahead for the UK's neglect of the coronavirus threat when it first arrived on British shores and for the subsequent ineffective response to it.

The Pound-Australian Dollar rate has given up all of its March gains this month and where it heads next will depend on the relative performance of the GBP/USD and AUD/USD rates. GBP/AUD always closely matches the sum of GBP/USD over AUD/USD but if the pace at which coronavirus lockdowns are lifted means anything to currencies at all then the outlook for Sterling could be much more fraught with risk than it is for the Aussie.

Countries' ability to "test and trace" is said by the World Health Organization and many non-medical observers to be key to keeping the coronavirus contained once lockdown restrictions are lifted, but the UK has failed miserably in its efforts to reach a self-imposed government target of 100k coronavirus tests per day during the April month. The UK was this week testing less than 20k people each day and the government has steadfastly refused to even countenance the idea of setting out a plan for exiting lockdown.

The UK had on Thursday the sixth largest number of known infections in the world, the fourth highest number of deaths and a mortality rate of 13.4% that matches those of Italy and France, according to Johns Hopkins University data. The death rate is comparable to those in Italy and France because the official totals omit elderly deaths taking place within care homes, as the UK government has not instructed one of its quangos to provide the relevant numbers to another of its quangos in time and order for them to be included in the disclosures.