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The Australian Dollar was drawing support from an improved yield offering Friday and tentative stability in stock markets but its path higher is being frustrated by technical headwinds and fundamental uncertainties that risk encouraging a lifeless range-trade in the months ahead.

Australia's Dollar was an outerperformer among major currencies in Europe Friday having notched up at least a fractional gain over most of its comparable rivals after Chinese stock markets found their footing, and as a cautious calm prevailed in European markets ahead of the weekend.

Price action came in spite of Victoria state having reported a record number of new coronavirus infections that's kept the national epidemic curve on a re-steepening trajectory, with 428 new cases confirmed on July 17.

"We now see NZD bearing less idiosyncratic downside risks than AUD (lockdown measures in Victoria) and CAD (spill-over from lockdowns in US)," says Francesco Pesole, a strategist at ING. "We expect a move back to 1.0600 in AUD/NZD in the short term."

Above: Australian Dollar performance on Friday. Source: Pound Sterling Live.

Close to half Australia's coronavirus infections are in Victoria, host to Melbourne city and a state that is home to around 20% of the national population, which contributes a similar one fifth share to GDP.

The new lockdown in Victoria is a blow to Australia's economic recovery but one that could be augmented if official concerns about New South Wales are vindicated by rising infection numbers in the coming weeks.

Restrictions on activity are already being tightened in New South Wales although the Australian Dollar has been unfazed by the threat of lower-for-longer activity levels and has instead drawn support from upbeat sentiment in stock markets as well as higher commodity prices and Aussie bond yields.

Above: Australian coronavirus epidemic curve and daily infection numbers. Source: Worldometers.

"Yields spreads in a very general sense are providing A$ with ongoing underlying support," says Richard Franulovich, head of FX strategy at Westpac. "The overall impression then is that beyond the daily barrage of negative virus and US-China headlines the underlying picture for AUD remains positive. The global monetary policy backdrop along with ongoing resilient commodity prices point to an AUD that should hold its own near term."

Australian and Kiwi government bond yields offer investors close to one percent per year, which is about as much as an investor can earn from holding a major currency in the coronavirus plastered world of 2020 without taking the risks associated with buying Italian government bonds.

This is after the Reserve Bank of Australia (RBA) called time on its interest rate cuts when the cash rate got to 0.25% and as Australia benefits from its export exposure to a recovering Chinese if-not global economy.

Above: AUD/USD shown at daily intervals alongside S&P 500 (orange line).

"AUD again failed to get much traction above the key 0.70 level as a turn in risk sentiment led cyclical FX lower. Bias for the near-term is balanced, with an eye on Asian equities for direction," says Adelaide Timbrell, an economist at ANZ.

Bond yields offer support to the Aussie though a more important influence is the trajectory of stock markets and degrees of risk appetite that have driven them of late, with a recent emphasis on Chinese stocks.

China's Shanghai Composite Index rose 0.13% Friday, drawing a line under losses that still leave it down -5% for the week. However, price action follows a rally that was seen as being engineered by the government and which has still left the benchmark 10% higher for the month. Meanwhile, the S&P 500 has pulled international counterparts higher with the U.S. barometer now just a fraction of a percent away from its breakeven level for 2020 on Friday.

Above: AUD/USD shown at weekly intervals alongside Shanghai Composite Index (orange line).

"Although AUD is primarily driven by USD direction, the Chinese sharemarket has also been an influencing factor more recently," says Kim Mundy, a strategist at Commonwealth Bank of Australia. "AUD/USD has now been trading largely within in a 0.68‑0.70 range since the beginning on June."

Rising or otherwise steady stocks indicate an optimistic investor outlook for the global economy and healthy levels of risk appetite that argue in favour of outperformance for commodity currencies and weakness in the U.S. Dollar. But investors are flying blind and will continue to for months yet which, when combined with sharp earlier gains that have all but erased the coronavirus from history for some markets, could mean that a protracted period of range trading is set to dominate through the rest of summer.

"US daily card spending data continues to show little impact from the coronavirus outbreak in southern and western US states. Many analysts, including ourselves, had concerns the outbreak may halt the recovery in spending. But so far, rising infections have not led to a surge in deaths and as a result, additional lockdowns have been limited," Mundy says.

Key to appetite for the Aussie is the assumption that economies will rebound quickly once restrictions on activity are eased, which means investors will need to see third quarter data to be sure they were right to pile back into risk markets from late March onward. Second quarter data will mostly reflect the damage done by the 'lockdown' measures used to contain the coronavirus.

Above: AUD/USD at weekly intervals with Fibonacci retracements of 2018 fall as well as 55 (red) & 200-week averages

Third quarter data will not be available for many countries until late in 2020, leaving an air of uncertainty over the outlook as investors are left with little choice but to take cues from high frequency, but unofficial indicators like changes in credit card spending in the interim.

"Yesterday’s positive mood was tainted by another devastating weekly jobless claims report. Claims remain roughly double their highest point during the 2007-09 Great Recession. The trade-weighted US Dollar index thus snapped a 4-day losing streak," says George Vessey, a currency strategist at Western Union Business Solutions, of Thursday's U.S. weekly unemployment claims report.

Fundamental uncertainties will endure and it's not clear that so-called high frequency indicators can instill enough confidence for investors to bet more heavily on a recovery, or to compell a capitulation over existing positions. This risks reinforcing technical resistance at 0.70 for AUD/USD and if nothing else, might mean a lifeless range trade looms because once back below 0.67, the Aussie could draw dip buyers seeking to position for the next leg higher.

"The million dollar question is, of course, where to from here? The CARES Act, which directly added money to the wallets of US consumers is expiring, and US politicians have yet to start the debate about a potential extension," says Jeroen Blokland, a multi-asset portfolio manager at Robeco, a buy-side firm with €171bn (£151bn) of assets in 2019. "Pressure on both sides to come up with a strong package is high, given the uncertainty about economic recovery and the upcoming elections. Yet, some pressure on July retail sales seems likely."