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Risk sentiment bounces back as investors look beyond Omicron headwinds

Wednesday 22 December, 2021

Daily Currency Update

The Australian dollar trended higher through trade on Tuesday, fending off a break below supports at 0.7070 and extending back through 0.7150. A shift in market sentiment drove direction as risk assets enjoyed support and treasury yields rose. Investors appeared to look past near-term Omicron headwinds instead betting the new strain will not disrupt the global economic recovery. While we are still awaiting firm scientific evidence that this new variant is less virulent, anecdotal reports continue to support this thesis, helping ease concern and stave off a significant risk-off shift. With little headline data on hand to drive direction, the risk narrative will remain front and centre leading into the Christmas and New Year holiday period. We expect the AUD will remain range-bound, fluctuating between supports at 0.70 and resistance at 0.7230. Risks to this outlook remain the evolving Omicron impact. A worst-case scenario and complete risk sell-off will see the AUD test new lows.

Key Movers

Risk sentiment shifted on Tuesday as investors set aside fears the Omicron variant will derail the global economic recovery, prompting a sell-off across haven assets. The Japanese yen and Swiss franc were among the day’s worst performers, with the yen giving up 114 amid a broader USD/JPY correction and potential shift back toward 115. With investors chasing risk assets the USD came under pressure giving up ground to commodity led counterparts and the GBP. Sterling surged back through 1.32, testing 1.3270 while the euro drifted sideways, unable to maintain Monday’s momentum, slipping back below 1.13. With little of note on the macroeconomic ticket this week, direction will stem from ongoing fluctuations in the risk narrative. We broadly expect the USD will maintain its recent momentum leading into Q1 next year as markets adjust expectations for Fed monetary policy normalisation.

Expected Ranges

  • AUD/USD: 0.7070 - 0.7230 ▲
  • AUD/EUR: 0.6250 - 0.6420 ▲
  • GBP/AUD: 1.8480 - 1.8620 ▼
  • AUD/NZD: 1.0520 - 1.0590 ▼
  • AUD/CAD: 0.9180 - 0.9280 ▲