- AUD scrapes bottom of FX barrel after Asia market weakness.

- Risks a short-term correction with commodities, Westpac says.

- As investors weigh near-term growth threat Vs recovery outlook.

- RBA policy update looms with QE extension potentially in cards.

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GBP/AUD spot rate at time of publication: 1.7779Bank transfer rate (indicative guide): 1.7250-1.7360FX specialist providers (indicative guide): 1.7440-1.7580More information on FX specialist rates hereThe Australian Dollar underperformed with Asian financial markets on Wednesday and is vulnerable to softening commodity prices in the short-term, according to strategists at Westpac, who see risks of a correction in AUD/USD ahead of further gains later in 2021.

Australia's Dollar was lower against all major rivals following declines in Asian stock markets as well for many commodity prices owing to a perceived change in People's Bank of China monetary policy and recent escalating concerns about the outlook for the global economy in the weeks ahead.

"The noise around gradual policy normalisation in China is growing louder. The former chief economist of the PBOC, Ma Jun, said that policy should be tightened to stop bubbles forming in the stock and property markets," says Adam Cole, chief FX strategist at RBC Capital Markets.

This is after renewed lockdown in parts of China and escalating as well as prolonged measures in Europe have prompted investors to contemplate the kinds of costs that might yet be borne by the global economy before mass availability of vaccines facilitates the sustainable recovery that financial markets had taken for granted.

Above: Australian Dollar performance against major currencies on Wednesday.

Concerns about the short-term growth outlook have been exacerbated by the apparently fading prospect of President Joe Biden's $1.9 trillion stimulus bill making it through Congress in one piece, although they're particularly pertinent for the Aussie because of the impact they've had on commodity prices.

Industrial metals and other raw materials prices have come off the boil and aided an ongoing stabilisation of the U.S. Dollar, which is doubly problematic for the Aussie because gains in commodities have lifted the currency's valuation sharply in the last year.

‘Stay long, with a tight stop’ for the A$. Signs of softening in commodities with zinc down 8% from the Jan 8 highs on the tightening credit conditions in China, iron ore down 4.5% on rising port inventory and plunging steel mill profitability, and crude down 2.5% on LNY travel restrictions in China all add to the near term correction risks," says Richard Franulovich, head of FX strategy at Westpac. "The prospect of additional US fiscal support and a faster pace of US vaccine deployment compared to most (ex-UK) should tip growth differentials in the USD’s favour. But that will only give fleeting support for the USD."

Westpac continues to bet on a higher AUD/USD rate in the months ahead but has set a tight stop-loss around 0.7680 on its current trade, with one eye on a steadying U.S. Dollar, which has benefited from global growth concerns but could also be supported in the weeks ahead by a quickening vaccine rollout.

Above: AUD/USD shown at daily intervals alongside U.S. Dollar Index (blue).

Some 6 percent of the U.S. population are thought to have been vaccinated already, placing it hard on the heels of the UK with 10% coverage in the major economy space, which could set both countries up for a headstart in the global economic recovery that's still anticipated for later in the year.

"Meaningful disparities in vaccine doses administered are emerging across the major economies. That might create potentially large growth differentials," Franulovich says. "Intriguingly, FX price action in recent weeks loosely fits the growing disparity in vaccine rollout. The USD and GBP have been outperformers, fitting their relatively faster vaccine rollout profile, while EUR has lagged. Admittedly, USD outperformance in recent weeks can also be attributed to a reassessment of the US outlook following Biden’s $1.9trn fiscal support plan, while GBP outperformance is also function of diminished hard Brexit risks."

Still however, the calibration of Federal Reserve (Fed) monetary policy is expected to continue to argue against sustained strength in the U.S. Dollar this year, enabling the Aussie and other currencies to extend rallies against the greenback. But in the short-term at least, the risks for the Australian Dollar are seen on the downside as investors weigh the immediate risks to the global economy against the odds of a vaccine-induced recovery further down the line.

"USD and concerns over the veracity of ongoing strong Chinese iron ore demand is weighing on AUD. Bloomberg reported that China’s Ministry of Industry and Information Technology reconfirmed numerous measures to help reduce steel output in China. The proposals include a medium‑term plan to reduce reliance on imported iron ore. Over 80% of Australia’s iron ore exports are sent to China," says Kim Mundy at Commonwealth Bank of Australia.

Above: Pound-to-Australian Dollar rate shown at daily intervals alongside U.S. Dollar Index (blue).

The Australian Dollar outlook is further complicated by expectations that the Reserve Bank of Australia (RBA) will extend its A$100bn quantitative easing programme as soon as next week, which is a threat to bond yields and potentially the currency too given how Governor Adrian Lowe has previously objected to strength in the Aussie. The bank cut its interest rate toa new low of 0.10% in September 2020 and launched an expanded bond buying program while also warning that it's watching the currency closely.

"Locally, Australian Q4 20 CPI was stronger than consensus at 0.9%/yr (in line with CBA forecasts). We see no immediate implications from the stronger result, with inflation still running well‑below target. We expect the RBA to retain its forecast in the February SMP for below target underlying inflation over 2021 and at least until mid‑2022," Mundy says.

The RBA will announce its latest policy decision next Tuesday at 03:30 London time and may be more likely to extend its stimulus program sooner rather than later in light of Wednesday's final quarter inflation figures. Prices rose 0.9% last quarter in Australia, faster than the 0.7% increase anticipated by consensus, although inflation remains a long way below the RBA's 2% target and even then some economists say last quarter's number was misleading for its strength,

"In underlying (trimmed mean) terms, prices rose 0.4% q/q, a rate that to us suggests the RBA is going to continue with a very accommodative policy stance. Underlying inflation is still far from target and to eventually get it there, the unemployment rate will need to be considerably lower and wage growth much higher. As such we look for the RBA to extend its QE program with an announcement possible as early as next week when the Board meets," says Catherine Birch, an economist at ANZ.