AUD hoping to break the bear trend
The Australian dollar is enjoying this week a lot more than the previous five weeks, with AUD rising over 1% versus the US dollar. The more positive risk mood concerning the Omicron variant, bolstered by an upbeat tone from the RBA is helping commodity currencies. Policy easing by the People’s Bank of China, cutting the amount of cash that banks must hold in reserve and thereby unleashing $188bn of liquidity is also supportive of more risk taking.
RBA optimism overnight
The RBA kept its policy settings unchanged as expected this morning. The bank is set to keep rates at 0.1% and weekly bond purchases of $A4bn intact until at least mid-February 2022 and will not raise rates until actual inflation is sustainably within the 2%-3% target range. But policymakers are open to a more abrupt ending of bond buying, as opposed to tapering its purchases. This is allowing markets to speculate that the board may follow the more hawkish Bank of Canada’s lead.
The new policy statement dropped several small references arguing to keep its monetary policy very accommodative as long as possible. It also turned somewhat more upbeat with their say on the Omicron variant which has grabbed the wider market’s attention. The bank said the Omicron variant is “a new source of uncertainty but is not expected to derail the recovery.” Policymakers emphasised household spending and business investment above the new variant and a further pick-up in wage growth is expected as the labour market tightens. Clearly, in a similar way to the Fed, the RBA do not see the current angst over Omicron dampening the recovery and the policy outlook.
Short squeeze lifts AUD
The Aussie was the most oversold currency in the G10 and the market is squeezing the shorts this week. AUD/USD posted a new cycle low below the key psychological 0.70 level last Friday, with the November 2020 bottom at 0.6991 reinforcing this level of support. This rebound came after five straight weeks of losses from the late October top at 0.755.
Bulls are now enjoying two rare days of gains this week and clearing the oversold conditions on the daily RSI. The August low at 0.7106 is the next resistance level to negotiate, along with trendline resistance from that October high. If the risk mood continues to brighten, the September bottom at 0.7170 sits above with the 50-day and 100-day simple moving averages around 0.7320.