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- GBP/AUD spot at time of writing: 1.9614

- Bank transfer rates (indicative): 1.8925-1.9062

- FX specialist rates (indicative): 1.9317-1.9435 >> More information

The Australian Dollar found its footing against the U.S. Dollar and Pound Sterling Friday but is said to be vulnerable to fresh losses going forward due to overvaluation and a still-dire outlook for the global economy, which might help keep the Pound-Australian Dollar rate on an upward trajectory.

Australia's Dollar turned higher against the greenback and Pound in Friday trading as the mood among investors improved in response to plans from the U.S. and some European countries to lift the 'lockdown' of peoples and economies as well as hopes that the remdesivir antiviral drug might help to facilitate this.

"The Aussie definitely got a dose of good news early last night off the Gilead COVID-19 treatment headlines," says Eric Bregar, Head of FX Strategy at Exchange Bank of Canada. "The major currency pairs are still arguably trading in ranges though, and so we think the Australian Dollar will follow suit as well."

Optimism about the prospect of a gradual return to normal gave stock and some commodity markets a boost heading into the weekend and helped arrest earlier declines in Aussie exchange rates.

The Australian Dollar had been on the backfoot heading into the final session of the week after it was revealed that China's economy contracted for the first time since 1992 and by a larger measure than was anticipated by economists, news of which came alongside a further tapering of the Reserve Bank of Australia (RBA) quantitative easing or government bond buying programme which was only just launched less than a month ago.

"The RBA ‘tapered’ their bond purchases today, opting for just $A750m of bonds, again coming in for the Apr‑25 to Apr‑27 bucket. So far, the RBA’s asset purchase program is working well. Australia 3‑year government yield is trading around the RBA’s 0.25% target," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "Expectation for a sharp contraction in global economic activity means AUD/USD and NZD/USD remain vulnerable to renewed downside pressure."

Above: AUD/USD rate steadies after retreating from 61.8% Fibonacci retracement of 2020 downtrend.

As the country's largest trading partner and main global buyer of the hard commodities exported from Australia, bad news from China is also bad news for the Aussie, although the ongoing tapering of the RBA QE programme is technically positive for the currency because it means less downward pressure on short-term Aussie bonds yields. However, it took a broad increase in prices of risk assets during the European session for the Aussie to find its footing.

Australian Dollar indifference to a tapering RBA speaks volumes about the extent to which investors and markets are focused almost exlusively on the curtailment of the 'lockdown' measures in place across all major economies including Australia. The U.S. set out plans Thursday for states to begin easing restrictions, although both Australia and the UK have this week extended their respective lockdowns for a further three weeks.

"We note that AUD's large gap to [short-term fair value] makes it vulnerable to a setback in risk appetite even if the market is positioned short," warns Mark McCormick, global head of FX strategy at TD Securities. "Even so, we think the 0.60 level should offer good entry points for the months ahead, reflecting AUD's unique mix of monpol, fiscal and valuation."

McCormick and the TD team sold the AUD/USD rate earlier this week, citing short-term overvaluation against the U.S. Dollar and concerns about what investors might read into corporate earnings figures released in recent days and the first-quarter Chinese GDP data that hit the wires on Friday. They say this short-term overvaluation will get "plugged" by a falling Australian Dollar in the weeks ahead but that RBA tapering of QE programme and pension-related flows could aid an Antipodean recovery further out.

The objective of QE is to stimulate activity by reducing interest rates charged across the economy by forcing government bond prices higher and yields lower. This reduces borrowing costs for everybody because government yields are baked into all other interest rates charged, but one side effect is that the local currency becomes less attractive to international investors given that falling yields also squash returns. The reverse is also normally true and TD Securities is not alone in viewing it as a support for the Aussie.

Above: Pound-Australian Dollar rate retreats from April highs, clocking up daily closes below 21 and 55-day moving averages.

"RBA policy minutes and Lowe’s speech will be critical to understanding current yield curve policy given the material scale back of RBA bond purchases. As we noted last week, an environment of stabilising global sentiment and by extension steepening curves runs the risk of AUD outperformance, given the RBA’s emphasis on fixing the 3y part of the curve only (while allowing the market to determine the 10y part)," says Daniel Been, head of FX research at ANZ.

The RBA said on March 20 it would buy A$5bn per day in government bonds in order to keep the three-year bond yield at 0.25%, in line with the new record low of the cash rate, but it's since cut those purchases to just A$750mn on Friday. This, when combined with a retreating coronavirus and recovery of investor risk appetite could compell an exodus of capital from the safe-haven market for 10-year bonds, which would likely lift 10-year yields sharply.

If 10-year yields rise while the three-year is pinned down at 0.25% then investors would be confronted with a 'steeper curve' or 'curve steepening' which is a de facto promise from the market of even higher returns further down the line and something that could draw international interest in the Australian Dollar.

Antipodean curve steepening would be a downside risk for the Pound-Australian Dollar rate but while lockdowns remain in place the world over the Aussie's higher sensitivity to still-depressed commodity prices could ensure support for the British currency relative to its Australian counterpart. However, and for the time being at least, the Pound-Aussie rate remains in retreat from early April highs and has seen daily closes below its 21-day and 55-day moving-averages marked in black and orange on the above chart.

“Since developed markets reached a peak in the number of new COVID-19 cases, the news flow has improved significantly, with risk assets following along. The focus is now turning to the approach to re-opening economies, particularly in Europe and the US. Key to this remains the infrastructure to test-and-trace populations and the health care capacity to manage any new outbreaks," says ANZ's Tom Kenny. “While resuming activity after this health crisis is one thing, the globalised nature of supply chains raises the risk of bottlenecks and dislocations to activity. Collapsing discretionary spending and low business investment are also expected to continue in the medium term."

Above:GBP/AUD shown at weekly intervals. Finding support after failed run at 78.6% Fibonacci retracement of 2016 downtrend.