- GBP/AUD eyes 1.89 with scope for 1.97 multi-month

- As ‘lockdown’ threatens job recovery, RBA outlook

- AUD/USD on course for 0.7234, may even see 0.70

- Any AUD/USD fall to 0.70 may lift GBP/AUD to 1.97

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GBP/AUD reference rates at publication:Spot: 1.8647Bank transfer rates (indicative guide): 1.7990-1.8125Money transfer specialist rates (indicative): 1.8480-1.8516More information on securing specialist rates, hereSet up an exchange rate alert, hereThe Pound-to-Australian Dollar rate has hit new one-year highs but could rise as far as 1.89 over the coming days as the coronavirus closes Australia’s economy anew and threatens to scupper the Reserve Bank of Australia’s planned winding down of its quantitative easing programme.

Australia’s Dollar was in an all-out retreat on Monday in price action that lifted the Pound-to-Aussie rate rising to new one-year highs above 1.86 after Sydney and some areas of New South Wales saw lockdown restrictions tightened over the weekend.

The state accounts for around a third of Aussie GDP and is home to a quarter of the population who’ve been confined to homes, with many businesses forced to close just days after Australia’s second most populous state, Victoria, also suffered the same.

The danger is now that renewed closures remain in place for longer than initially telegraphed and that they undermine the job market as well as broader economic recovery that was responsible for July’s Reserve Bank of Australia (RBA) decision to reduce slightly from September the amount of government bonds bought each week under its quantitative easing programme.

“The Aussie has struggled against a firm US dollar over the past week, printing fresh 2021 lows. While commodity prices remain supportive and Australia's unemployment rate dropped below 5% in June, the growing economic damage of lockdowns to contain Covid-19 is chipping away at the currency,” says Sean Callow, a strategist at Westpac.

Above: AUD/USD at daily intervals with Fibonacci retracements of 2020 recovery and GBP/AUD.

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Australia had previously enjoyed the strongest labour market recovery in the developed world with RBA Governor Philip Lowe having noted frequently in recent months that more Australians were employed in the first half of this year than were before the coronavirus came along, although this was in large part thanks to the country’s earlier speed at containing the virus.

“AUD/USD is heavy near 0.7385 and could set new year‑to‑date lows this week in our view. The near term economic outlook in Australia has deteriorated sharply because roughly half of Australia’s population and economy is locked‑down,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

New closures, their impact on the economy and the potential knock-on effect on RBA policy have already put Aussie bond yields under pressure and dealt a blow to the main Australian exchange rate AUD/USD, leading to technical damage on the charts and placing it at risk of falling back to its lowest levels since before last November’s U.S. election.

“We believe that the market has topped longer term. Below here lies the mid-September and early November highs at .7346/40 and the 200 week moving-average at .7234,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

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Jones and the Commerzbank technical analysis team said Monday that clients should bet against AUD/USD if it recovers back to 0.7440 and are targeting a move down to the 200-day moving-average at 0.7234 over the coming weeks in what is by implication a bullish indication for GBP/AUD.

The Pound-Australian Dollar rate would rise above 1.89 and to its highest since April 2020 if AUD/USD reaches its 200-day average, and even if the main Sterling exchange rate GBP/USD retreats over the coming days back to the 1.3697 level anticipated by Commerzbank.

"Our fixed income analysts now expect the Australian 10-year bond yield to fall to 1.0% in the near-term because of the headwinds facing the Australian economy from the lockdowns. Their forecast for the U.S. 10-year bond yield was cut slightly. We now expect the Australia minus U.S. 10 year bond spread to be sustained below zero, reaching -25bp, for the next few months,” CBA’s Capurso says.

Above: Pound-Australian Dollar rate shown at weekly intervals with Fibonacci retracements of April 2020 fall and key averages.

The Pound could go further still however if CBA is right that nascent pressures on Australian government bond yields resulting from the new shutdowns could lead AUD/USD to fall below its 200-day average in the months ahead.

“Our research indicates tentatively that AUD faces double the downside when the Australia minus U.S. 10 year bond spread is below zero,” Capurso adds.

Pressure on Australian yields had already led on Monday to the differential between 10-year Aussie and U.S. Treasuries falling below zero in what is a toxic development for AUD/USD, though one which could grow more intoxicating still if CBA is right to anticipate a fall to -0.25% in coming months.

CBA says this could lead AUD/USD to fall back to 0.70 this summer, which would lift the Pound-to-Australian Dollar rate to 1.97 and a level rarely seen since the Brexit referendum of 2016, even if the main Sterling exchange rate GBP/USD remained suppressed near Monday’s 1.3720.

The main Sterling rate GBP/USD would need to fall all the way from 1.3725 to 1.3250 over the same period simply in order to GBP/AUD from rising beyond 1.89 in any market where AUD/USD at 0.70.

“Given the emerging risks, AUD/USD could dip below 0.70 temporarily,” Capurso says. “We still consider the consensus is too optimistic on AUD for the remainder of 2021.”

Above: AUD/USD shown at weekly intervals with Fibonacci retracements of 2020 recovery indicating support and 02-year as well as 10-year AU-U.S. bond yield spread.