- AUD/USD crosses 0.7030 after RBA gives AUD, yields a free pass.

- AUD intervention unlikely, says no more QE absent big rise in yields.

- AUD shrugs off rising infections, creeping lockdown as budget looms.

- AUD/USD could target 0.7240 following any daily close above 0.7030.

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Australia' Dollar was testing an important technical resistance barrier on Tuesday as risk assets outperformed and after (RBA) Governor Philip Lowe gave the antipodean unit a tacit blessing to keep on rising, which could see AUD/USD targeting an 18-month high once past 0.7060.

Australian exchange rates were all higher on Tuesday as risk assets were lifted by an ebulient mood that had roots in speculation that a coronavirus vaccine might soon be ready, but which was bolstered by European Union leaders who took markets by surprise when they unanimously endorsed the bloc's €750bn coronavirus recovery fund and the next seven-year EU budget.

"The USD is still relatively on its heels, with bellwethers like AUD managing to hold over the psychological 0.70 level for example, and EUR at 1.1440. However, lights at the end of the tunnel can be either an exit or trains coming towards us; and some might want to consider that in some key cases it could still prove to be either," says Michael Every, a global strategist at Rabobank.

Above: Australian Dollar performance against major rivals on Tuesday. Source: Pound Sterling Live.

The Aussie was already on its front foot after RBA Governor Philip Lowe said the exchange rate is "broadly aligned with its fundamentals” and that a "sustainably higher" three-year government bond yield would be required in order for the bank to restart asset purchases under the quantitative easing programme that was quickly wound down after having only just been launched in March.

"Throughout the speech and the Q&A that followed Governor Lowe reiterated the economic recovery is like to be slow and bumpy, unless a vaccine for COVID‑19 is developed. Today’s speech also included a detailed discussion on ‘helicopter money’. That is the process of the central bank creating money and giving it directly to households or the government to spend. Governor Lowe emphasised that helicopter money is unnecessary in Australia because the government can borrow easily and at very low interest rates," says Kristina Clifton, an economist at Commonwealth Bank of Australia.

Lowe confirmed that he'd prefer a lower exchange rate, though he also acknowledged that the Aussie would need to move "a long way" above current levels before an argument could be made that it's misaligned with its fundamentals. The central bank chief policymakers have not ruled out adjusting monetary policy settings "if circumstances warranted" but reiterated that "negative interest rates in Australia remain extraordinarily unlikely."

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

"The currency pair has so far reached the .7031/62 resistance area which consists of the December and June highs. It still caps for now, but it should be noted that a rise above it would introduce a target of .7284, the 55 month moving average," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, who's betting that an AUD/USD rises to 0.7250 in the months ahead. "We have a minor uptrend at .6909 and would tighten profit stops to just below here."

The Australian Dollar has been roadblocked for weeks by technical resistance between 0.7030 and 0.7060 but was testing 0.7060 Tuesday and appeared poised for a break to new highs, as commodity currencies and risk assets enjoyed a tailwind of support arising from optimism about seemingly improving prospects for a coronavirus vaccine.

A working treatment that can be rolled out globally would have scope to neutralise the still-growing pandemic and assure a global economic recovery.

Vaccine hopes and continued fiscal support from governments across the world have so far enabled investors to shrug their shoulders at mounting second waves of infection in the U.S. and Australia as well as elsewhere.

Above: AUD/USD rate shown at weekly intervals alongside ASX index futures (orange line).

Coronavirus cases surpassed 12k in Australia this week, where authorities in New South Wales and Victoria are enforcing fresh restrictions on movement and activity to stem the second wave after confirmed infections nearly doubled in July. New lockdowns will hamstring the Australian third-quarter economic rebound for at least a month longer, necessitating continued government financial support for companies and households.

On Monday Australia's government extended the JobKeeper scheme that has protected 3.5 million livelihoods and underwritten the wage bills of some 960k companies, so that it runs until March 2021 although the amounts paid to companies will be tapered off gradually, which is similar to HM Treasury's approach in the UK. The extension came ahead of a budget update that's planned for Thursday, which will be scrutinised closely by the Aussie in the hope of finding further support for the economy.

"Risk is for further slippage in the Budget if lockdown restrictions are extended that increases the chance of the AAA rating coming more into focus over the year. The scale of the government's financing task has already seen a surge in bond supply. However, demand for AUD debt by foreign investors has also risen," says Tony Morriss, head AU and NZ economics at BofA Global Research.