Fundamental Australian Dollar Forecast: Bearish

  • The Australian dollar hit a new low against the US dollar last week
  • Omicron Covid-19 variant poses risk if strict lockdowns ensue
  • Attention Shifts to Reserve Bank of Australia, Forecast 2022

The Australian dollar has continued to set new lows against the US dollar this year, falling the most in 2 weeks since June, closing at the lowest since July 2020. The risk-sensitive currency was battered by the emerging variant Omicron Covid-19, which could weaken global growth prospects. That’s when the Federal Reserve delivered a pretty hawkish pivot last week, remove the word “transient” from the description of inflation.

The Australian economy sits at the start of the global supply chain, which makes the following developments around Omicron important. Blockages risk harming local growth. While the first cases of the new variant nationwide have already been found, Chief Medical Officer Paul Kelly noted that there is no indication that it is more deadly than the other strains.

Yet the AUD has followed a decline in commodity prices alongside a decline in global stocks – see chart below. Iron ore, the country’s main export, remains more than 55% below highs reached earlier this year. This leaves the merchandise around pre-Covid levels. Meanwhile, the economy is rebounding after lockdowns at the start of the year triggered by the Delta Covid-19 variant.

Domestically, the Aussie will closely monitor the Reserve Bank of Australia’s rate decision. This follows the central bank’s abandonment of yield curve control as the RBA continues to cut its bond purchases. But, Governor Philip Lowe reiterated that the data and forecasts do not justify a rate hike in 2022. It is contrary to what the markets expect.

Looking at Bloomberg’s forward curves, markets see one-year rates around 0.9% versus 0.1% today. It could actually open the door to disappointment if the central bank continues to reiterate that a policy tightening in 2022 is unlikely. Meanwhile, another strong US CPI report in the coming week could benefit the US dollar at the expense of its major counterparts.

Australian dollar versus. MSCI World Index, BBG Commodity Index Futures and AU Bond Yields

Aussie dollar could wobble on RBA rate decision, Omicron variant and US CPI

Chart created using TradingView

* The principal-based AUD index averages the AUD against the USD, EUR, GBP and JPY

— Written by Daniel donssky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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