AUD Rallies On Risk Drive

The Australian Dollar is bouncing back this week. After getting slammed across the whole of November, the current rally is little but a footnote on the month’s decline, though nonetheless is a welcome break for bulls. The rally is due in part to the better risk appetite we are seeing this week as investors look beyond the initial Omicron fears. The market seems to be buying into the view that the new strain, though more infectiousness, is not as deadly and should therefore cause less disruption than initially feared. Risk assets across the board are rebounding this week, pulling the higher beta Aussie up with them. The rally is also connected to the December RBA meeting held overnight.

RBA Stands Pat

As expected, the RBA held its headline cash rate unchanged at 0.1% during the overnight meeting. Additionally, the central bank held asset purchases at current levels and signalled no pressure to rush into tapering. Traders were keen to hear the bank’s assessment of the risks around Omicron given its recent emergence and there was likely plenty of relief as the bank acknowledged the new variant though said it did not feel that it was a risk to the economic recovery in Australia.

RBA To Remain Patient

Looking ahead, the RBA noted that it “ is committed to maintaining highly supportive monetary conditions to achieve its objectives," adding also that

"This is likely to take some time and the Board is prepared to be patient." The RBA was clear in pointing out that while inflation was rebounding, it was still at a more subdued level than seen in many other developed economies and is forecast to rise at a gradual pace, given still-weak wage growth. The RBA has noted before that wage growth was weak ahead of the pandemic and has now been set back further.

February Meeting In Focus

With regard to bond buying, the RBA confirmed that it will reconsider it’s bond purchase program in February. While the bank is not forecast to cease purchases until mid-next year, there is speculation now that purchases could end altogether in February if data continues to improve. Broadly speaking, the RBA was optimistic on the domestic economy, noting better labour market data and retail sales, reflecting higher consumer demand on the back of lockdown easing.

Technical Views

AUDUSD

The rebound off the .70009 level has seen the Aussie moving back up to just shy of testing the .7112 level and bear channel top. This is a major level for the Aussie and bulls will need to see a break higher here to encourage momentum for a fuller reversal. A failure here, however, will keep the focus on further downside with .6924 the next level to note.