- AUD breaks above 0.7315 as USD rout resumes, could go higher.

- Natixis eyes 0.7374 Nov 2018 high and Aug 2018 high of 0.7411.

- Commerzbank techs eye major Fibonacci retracement at 0.7574.

- Breakout follows wave of FX forecast upgrades from local lenders.

Image © Adobe Images

GBP/AUD spot rate at time of writing: 1.8147Bank transfer rate (indicative guide): 1.7512-1.7639FX specialist providers (indicative guide): 1.7875-1.7984More information on FX specialist rates hereThe Australian Dollar was charging higher on Friday after breaking above an important resistance level on the charts, although technical analysts at Natixis and Commerzbank are looking for even higher levels still while recently upgraded forecasts from local lenders also envisage a continued rally.

Australia's Dollar advanced on a retreating greenback and also scored gains over Sterling, the Canadian Loonie and Swiss Franc after rising above an upward sloping trendline that had offered resistance at 0.7315 on the charts.

The Aussie was vying with the New Zealand Dollar in a bid to become the week's best performing major currency.

"Daily volatility has tightened sharply in recent sessions, which is often the first sign of strong price movement. This move should be bullish given the favorable stance of the daily stochastic" says Micaella Feldstein, an analyst at Natixis. "The pair is very likely to test the resistances at 0.7315/24 (uptrend line). The rebound is likely to gain further momentum upon a break of these levels towards 0.7374 (Fibonacci projection) and the 0.7411/24 area (monthly Bollinger upper band). Supports are at 0.7277, at 0.7237/52, at 0.7185- 0.72..."

Above: AUD/USD rate shown at hourly intervals.

Price action came with the U.S. Dollar in retreat from all major developed and emerging market rivals following a shift by the Federal Reserve (Fed) to new inflation targeting framework that some analysts say will see interest rates lower for longer even if inflation rises above the 2% target.

The new policy approach implies more downside for 'real yields' or bond yields after inflation has been taken into account and so has been interpreted as a bearish omen for the greenback by some, given that parts of the market may have been taking cues from changes in the real returns offered to investors.

"The moves in equity markets, when adjusted for market capitalisation and FX performance this month, suggests month-end portfolio-rebalancing flows are likely to be USD selling across the board, with the strongest sell signal in the case of the USD vs the GBP," says Manuel Oliveri, a strategist at Credit Agricole CIB. "We look at the change in equity performance by market capitalisation for all G10 currencies, and we adjust this for monthly FX spot moves. This provides an indication of how the value of assets has changed over the course of the month and thus the extent of portfolio rebalancing flows that will likely take place at the end of the month."

There's been a lot written by the analyst community about real yields as a driver of price action of late, although the view is not unanimous and there are other competing explanations for recent events. Nonetheless, the U.S. Dollar was lower and the 'high beta' Aussie advancing on half its major rivals.

Above: AUD/USD rate shown at daily intervals.

"AUD/USD has reached the 55-month moving average at .7288. A close above .7290 should be enough to target the .7394 December 2018 high and the .7574 78.6% retracement," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank in an early morning note.

AUD/USD climbed above the 0.70 handle in early trade Friday before briefly being quoted above the 0.7315 trendline referenced by Natixis' Feldstein, although she says November and August 2018 levels of 0.7374 and 0.7411 are now conceivable while Commerzbank's Jones is eyeing a major Fibonacci retracement up near 0.7474.

The latter level has not been seen since June 2018 and the early days of a two-year downtrend in Aussie exchange rates, which came alongside a slowdown in the economy which, when combined with Reserve Bank of Australia (RBA) monetary policy, saw the 2%-to-3% inflation target remain unattained.

The slowdown and underachievement of the inflation target eventually precipitated a series of interest rate cuts from the RBA, which took the cash rate down to a then-record low of 0.75% in October 2019. It's since been cut to 0.25% due to the coronavirus pandemic.

Above: AUD/USD rate shown at weekly intervals with Fibonacci retracements of 2018 downtrend.

"AUD finally has company - US equities and copper have joined the Aussie in eclipsing pre-COVID-19 levels (figure 1). Given the reconnection (figure 2), AUD upside could now open up if equities can grind higher (we forecast 74c). Yes, the price-earnings ratio is exceptionally high, but the earnings trough has passed, positioning is still low and valuations look fine vs bonds," says Tim Baker, a macro strategist at Deutsche Bank.

Technical analysts are looking for an extended run higher by the Australian Dollar, in line with recently upgraded forecasts from some of Australia's largest lenders. Westpac upgraded its year-end AUD/USD forecast from 0.72 to 0.75 last week while Commonwealth Bank of Australia also lifted its year-end projection to 0.75. NAB is looking for a year-end finish around 0.74 while ANZ sees the Aussie resting at 0.73 when the curtain closes on 2020.

"The hottest topic in markets over the week has been the shift in the US Federal Reserve’s inflation target. Despite the attention, the practical consequences are likely to be quite limited, given that futures markets were already pricing no tightening in policy until after 2023. The Fed will continue to do its best to drive inflation expectations up, which should help the currencies linked to commodities – a natural hedge against inflation. In fact we have seen this play out over the last month with both the AUD, NZD and CAD some of the best performers in the G10. In an environment where the Fed is not just moving to tolerate higher inflation but is actively seeking it, this could be a theme for some time," says Daniel Been, ANZ's head of FX research in a Friday note to clients.