Over the course of this week, government responses to omicron case numbers, and the subsequent performance of global stock markets, are likely to be the biggest influences on AUD/USD, rather than Tuesday’s RBA board meeting.
If governments around the world take the view that the covid variant is much less harmful than earlier variants of the virus, and government lockdowns are therefore not necessary, then equity markets can recover and AUD/USD will finish the week higher than where AUD/USD began the week, which was around 0.7000.
However, the medium-term AUD/USD outlook is much more supportive for USD currency strength, than strength in AUD. Implying AUD/USD will likely struggle to undertake much of a convincing lift this week. The US economy has expanded beyond its pre-covid slump, and the US unemployment rate at 4.2%, is edging closer to its pre-covid low of 3.5%.
According to last week’s comments by Fed Chairman Jay Powell, the Fed is likely to accelerate its tapering of asset purchases. Market pricing for the first rise in the Fed funds rate this cycle centers around mid-2022. It will be difficult for AUD/USD to convincingly lift when in contrast to the Fed, the RBA is set on leaving interest rates unchanged because Australian inflation pressures are relatively low, and wage growth remains modest.
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This week’s RBA meeting on Tuesday 7th December is the last RBA meeting of the year, and the last meeting until 1 February 2022. The RBA doesn’t meet in January. We are unlikely to get any significant policy changes by the RBA at this Tuesday’s meeting. Hence, the RBA board meeting is not likely to be a major moving event for the AUD/USD.
Last month there were more significant policy changes when the RBA decided to discontinue the target of 10bp for the April 2024 Australian government bond. More importantly for AUD/USD, the RBA affirmed that it “is prepared to be patient” and reinforced its commitment “to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target”.
In combination with the RBA deciding to maintain the policy of purchasing government securities at a rate of $4 billion per week, these events applied immediate downward pressure on the Australian three-year bond yield, the Australia-US two-year bond spread, and the AUD exchange rate.
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In tandem with the strengthening in the USD, and concerns on what the new omicron variant might mean for lockdowns and hence slower global economic activity, AUD/USD subsequently declined some 5 cents since the last RBA board meeting in early November.
Future reassessments of global economic activity, and hence the immediate outlook for AUD/USD, will be largely dependent on the actions governments around the world take regarding lockdowns.
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