AUD/USD: China’s recovery and a dovish Fed to sustain gains into 2021 – Westpac

The A$’s vaccine jolt higher has run into resistance around 0.73 this week. Equities are pausing for breath too, caught in a tug of war between medium-term vaccine optimism and tightening restrictions to curb covid spikes. But many currencies are still ploughing higher and A$’s commodity fundamentals remain in very good shape, per Westpac.

Key quotes

“The A$’s vaccine jolt higher has run into resistance around 0.73 this week. Global equities are pausing for breath too, caught in a tug of war between medium-term vaccine optimism and tightening restrictions to curb covid spikes. In recent days NYC schools were shuttered, California and Illinois reinstituted mitigation plans, Ohio imposed a statewide curfew and Tokyo raised their virus alert to its highest level. But many currencies are still forging higher and A$ has slipped to the bottom half of the G10 tables, ceding its usual outperformance position when the US$ broadly declines.”

“The RBA’s stepped-up pace of asset purchases may be one background factor capping the A$. Other headwinds include China’s intensifying threats to Australian exports, even as both nations sign the RCEP ‘free trade agreement’.”

“Yet the Bloomberg Commodity Index is holding near highs since March and iron ore is at 2 month highs above $125/tonne. China’s early control of Covid is helping cement a recovery that is continuing to gather pace. Industrial production grew 6.9% in October on levels a year ago, the third consecutive stronger than expected reading. A$’s commodity fundamentals remain in very good shape. Australia’s coronavirus picture remains very positive too, even with SA’s likely brief lockdown in response to a small number of cases. Victoria is opening up and encouragingly, jobs were already recovering in October, helping drive a stunning 179k job gain rather than the expected -30K.”

“The US$ is likely to breakdown to fresh lows at some point. US rebound momentum was already faltering and will surely slow further following the latest patchwork of local efforts to contain the virus’ spread. That, and reduced hopes for a large-scale fiscal stimulus that would have come with a blue wave US election outcome should see the Fed deliver a strong dovish message at their mid-December meeting.”