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Analysis

Offshore factors, omicron likely to dominate AUD moves

Australian currency coins and notes

The direction in AUD/USD is likely to be more influenced by offshore factors, than domestic economic data this week. The emergence of the new Omicron virus strain is generating concerns of further potential government lockdowns in a number of countries (including Australia), and hence weaker domestic and global economic growth. When concerns about slower global economic growth dominate, this tends to place downward pressure on AUD/USD. The chart below illustrates how sensitive AUD/USD is to changes in global economic growth.

Currency markets have a history of initially reacting to concerns of slower economic growth, then later adjusting when the facts become more certain.  In response to initial concerns of slower economic growth, the clear risk this week is AUD/USD declines and tests the 20 August low around 0.7105. Should AUD/USD move below this level, then it risks declining further and testing the 2 November 2020 low around 0.6992.

However, it should be stressed, that there are reports that the symptoms of the Omicron virus are very mild, and it is not certain that governments will follow through with harsh lockdowns that will result in slower economic growth. Until more information is known, AUD/USD will react to incoming news and economic data.

This week’s domestic economic data highlight is the Australian Q3 real GDP report, due Wednesday. Leading up to this economic release, additional Australian quarterly economic data releases, including inventories data (Monday), and the current account data (Tuesday) will provide further clues to the strength of Australia’s Q3 GDP.

Consensus for Australian Q3 real GDP is a contraction in growth of 2.6% (QoQ) due largely to government-induced lockdowns that occurred during the third quarter. The chart below illustrates the contributions to Australia’s GDP up until the end of Q2, 2021. Consumer spending remains the dominate driver of Australia’s real GDP growth, and this is also likely to be the case in Q3 too. 

It is safe to say that volatility in AUD/USD is likely to be higher this week, than it has been in the last few weeks. Increased demand for AUD/USD put options also suggests this is the case.

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