Image © Desiree Caplas, Adobe Stock

- AUD on cusp of technical breakout to the upside.

- But also on course for 2019 losses Vs USD, GBP.

- And outlook for 2020 is shrouded in uncertainty.

- Rabobank and Westpac both look for more losses.

The Australian Dollar is on the cusp of a breakout to the upside on the charts, according to some analysts, although the outlook for the antipodean unit next year is cloaked in a shroud of uncertainty.

Australia's Dollar is still on course to record narrow losses against the U.S. Dollar and Pound for 2019 but it's called a halt to simultaneous advances by the British and American currencies in recent weeks, which has led some to suggest the antipodean unit could be nearing a turning point.

The Aussie is still down 14% relative to the U.S. Dollar since January 2018 when it traded around 0.81 although the Tuesday session saw the AUD/USD rate marked down just 1.8% for 2019. The pair has risen strongly since setting a new decade-low at the beginning of October but is currently being roadblocked on the charts by its early November high just beneath the 0.6930 level.

Above: Australian Dollar performance Vs major rivals in 2019. Source: Pound Sterling Live.

"The Aussie continues to struggle against chart resistance in the 0.6920s today as traders are lacking a news catalyst to break the market to new swing highs," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. "A break above the 0.6920s would set trader sights on the December 13th high of 0.6940, but after that there’s not much resistance on the charts to hold back a market rally until at least the 0.7070s in our opinion."

Bregar says the Aussie is on the cusp of a break above the November high but that it will require a "news catalyst" in order to get across the rubicon. In the interim, institutional investor positioning is seen lending support to the Australian currency. Institutional investors were 'short' 46,578 AUD/USD contracts during the week ending 17 December, Chicago Futures Trading Commission data shows, which means investors had wagered substantial amounts of cash that the Aussie will decline in the weeks ahead.

The December 17 institutional position represents an increase on the net 'short' of some 36,808 contracts from the previous week but is still below the 52-week maximum of just over 66k contracts. Nonetheless all of those investors will have to buy back the Aussie in order to exit their bets if they go sour, which is something the market is likely attuned to and also a prospect that Bregar sees offering support to the Aussie in the weeks ahead. Each contract is worth A$100k.

Above: AUD/USD rate shown at daily intervals.

"Support below the 55 day moving average can be found at the .6800 December 10 low. Overall upside pressure should be maintained while last week’s low at .6800 underpins," says Axel Rudolph, a technical analyst at Commerzbank.

Australia's Dollar has rebounded strongly since the U.S. and China first said they'd reached a 'pahse one deal' to end the trade war them, and it could go even further in the year ahead. The prospect of a related global economic spring thaw, not to mention possible weakness in the U.S. Dollar ahead of the November presidential election, are just two of the positive factors that could lift the Aussie in 2020.

However, there's also no shortage of risks to the Aussie, not least of all the twin prospects of more rate cuts from the Reserve Bank of Australia (RBA) and the possibility of a continued deterioration in the global economy. After all, the Aussie has been crushed in recent years by falling bilateral rate differentials and is underwritten substantially by Australia's large commodity trade with the rest of the world.

"Slowing economic growth in Australia and the determination of the government to return a budget surplus suggest that there is the risk of further rate cuts from the RBA in 2020 and, when rates reached a floor of 0.25%, QE is likely to be invoked. While there may be some initial respite for the AUD, we see risk of renewed downside pressure on AUD," says Jane Foley, head of FX strategy at Rabobank.

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

The RBA hinted in December that it could cut rates again in February, after slasing its cash rate from 1.5% to 0.75% over the course of 2019, although developments in the jobs market and broader economy will be key to determining whether it does or not.

Rabobank forecasts that rate cuts and the risk of the RBA resorting to quantitative easing (QE) will drag the Aussie lower throughout 2020, leading the AUD/USD rate to close next year at 0.65, nearly 5% below Tuesday's level. The Pound-to-Aussie rate is seen rising more than 11% next year as the Brexit saga draws to a close, taking it from 1.87 Tuesday to 2.09 by the end of 2020.

The Dutch lender is not alone in looking for more losses either because Westpac, one of Australia's top four lenders, told clients last Thursday they should sell the AUD/USD rate if it makes it back up to the 0.6950 level any time soon and target a move back down to 0.670 during the first quarter of next year. Their idea is based upon the expectation that the RBA will cut rates twice more in the year ahead and do nothing to discourage depreciation of the currency.

"The RBA is heading into 2020 too optimistic on Australia’s growth prospects. After the striking weakness in consumer spending in the Q3 GDP report and partial data, we expect the RBA to cut its 2020 growth forecast from 2.8% to a sub-trend 2.5% in the February SoMP," says Richard Franulovich, head of FX strategy at Westpac. "This leaves the door open to the 25bp cash rate cut to 0.5% that we expect. Markets should then fully price a 0.25% terminal rate."

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