Aussie dollar shines in COVID-19 recovery

The Australian dollar shot to a three-month high, fully recovering from its COVID-19 induced slump, as the global economy finds its feet again.

The Aussie rose 1.7 per cent to US66.53¢ early on Wednesday morning, hitting the highest level since February 19 when there were just 17 COVID-19 cases reported in Australia.

The dollar has shone brightly against its peers in the last three months, with Taiwan's dollar and the Japanese yen the only major currencies trading firmer against the US dollar over that period.

The run has been driven by increased optimism about the global economy, higher commodity prices. and the rebound in equity markets.

On Tuesday, the S&P/ASX 200 Index escaped its 11-week bear market, joining equity markets in the US and Asia in recouping much of the losses suffered during February and March.

"The Aussie is the currency you want to own if you think the equity market recovery has legs," Westpac senior currency strategist Sean Callow said.

"For us, we would say in the near-term, the Aussie is looking so strong it would be unwise to get in its way. It's a very popular proxy for global risk appetite."

China's quick and early recovery from the COVID-19 pandemic has also supported growth in the Aussie dollar, with strong iron ore prices in particular offsetting concerns over Beijing's barley tariffs. China's intention to introduce a new security law in Hong Kong could reverse that.

"The fact the Chinese economy has come out of lockdown and economic activity is clearly improving, that's been supportive for iron ore prices," said NAB senior FX strategist Ray Attrill.

"The impact of that, China leading and being at the vanguard of post-pandemic recovery, has directly positive connotations for the Aussie, assuming we don't get into a more protracted trade dispute."

The Australian dollar has risen more than 20 per cent since bottoming on March 19, when a scramble for US dollars as central banks rushed to cut rates and implement quantitative easing drove it to a low of US55.10¢.

"That was very much a turning point," Mr Callow said.

"With the smoke clearing, that was overshooting and it probably should have never traded with a US55¢ handle."

While weakness in the US dollar has been supporting the Aussie's strong advance this week, the greenback has largely tracked sideways for most of the recovery.

The Aussie has also held firm against the New Zealand dollar despite the country containing the virus more successfully, with attention now turning to how the Kiwi will respond to the economic fallout.

"The RBA is remaining content with its monetary policies and that could be why the Aussie has outperformed the Kiwi in the past few months," Mr Callow said.

"The RBA is more upbeat while New Zealand is in a big hole for GDP in the second quarter."

While the recovery has been firm to date, the simmering tensions between Beijing, Washington and Canberra could derail its rebound.

"We're still being a little bit cautious," Mr Attrill said. "The war of words between the US and China has ramped up and the Chinese currency has been under pressure, the Hong Kong dollar too, so there's still some big clouds on the emerging market horizon."

The Australian dollar and emerging markets are linked in that they benefit from the same kind of appetite for risk.

"Some of those countries aren't containing the virus as much as some developed countries. Trump could tear up the new phase one agreement and impose new tariffs but most of those have been relegated to tail risks," Mr Attrill said.

"If something blows up in emerging markets, you could see the Aussie losing altitude. But at the moment, the trend is your friend."

In the last week, Westpac upgraded its Australian dollar forecasts, tipping it to reach US68¢ by the end of the year and US70¢ by March 2021.