8th December 2021 - AUD reclaims 0.7100, threats bullish technical break amid risk-on, hawkish RBA

Market Headlines

Equity markets remained in risk-seeking mode, as concerns about omicron receded. The S&P500 is currently up 2.1%, bond yields and commodity prices are higher, and risk-sensitive currencies outperformed. The US dollar index is up 0.2% on the day. EUR fell from 1.1298 to 1.1228. USD/JPY rose from 113.50 to 113.70. Outperformer AUD rose from 0.7070 to 0.7123. NZD rose from 0.6760 to 0.6787. AUD/NZD rose from 1.0460 to 1.0502.

US 2yr treasury yields rose from 0.64% to 0.68%, while the 10yr yield rose from 1.44% to 1.47%. Markets fully price the first Fed funds rate hike to be in June 2022. Australian 3yr government bond yields (futures) rose from 1.12% to 1.20%, while the 10yr yield rose from 1.65% to 1.70%. Markets fully price the first RBA rate hike to be in July 2022.

Commodities, Brent crude oil futures rose 3.6% to $76, copper rose 0.1%, gold rose 0.3%, and iron ore rose 6.3% to $110. The bi-monthly GDT dairy auction resulted in an overall price rise of 1.4%, with whole milk powder up 0.6%.

Overnight Range

AUD/USD 0.7040 0.7123

EUR/USD 1.1228 1.1298

GBP/USD 1.3209 1.3289

USD/JPY 113.40 113.78

NZD/USD 0.6737 0.6786

USD/CAD 1.2635 1.2766

USD/CNH 6.364 6.3761

AUD/JPY 79.81 80.92

AUD/NZD 1.0435 1.0501

AUD Thoughts

The Aussie dollar has continued to power higher throughout the session on Tuesday, moving to the north of the 0.7100 level in recent hours as risk appetite has continued to improve. That marks a more than 1.5% recovery from last Friday’s lows of just under 0.7000, with 0.9% of those gains coming on Tuesday. AUD/USD is now challenging the upper bounds of a descending trend channel that has been suppressing the price action going all the way back to early November. A break above this descending trendline, which the pair is currently flirting with just above 0.7100, would open the door to a sharp rally to the next area of resistance around 0.7170, ahead of the 21-day moving average just under 0.7220.

Driving the day

The main driver of the recovery in broad risk appetite on Tuesday appears to be markets pricing out prior pessimism about the impact of Omicron on the economic outlook in light of growing evidence that infections are comparatively “mild”. But sentiment is also receiving a helping hand as Chinese authorities signal intent to provide support to the economy in 2022.

After its 50bps reserve ratio requirement cut on Monday, which is expected to release CNY 1.2T in liquidity from the Chinese banking system, the PBoC cut rates on its re-lending facility by 25bps with the aim of supporting the rural sector and small firms. Meanwhile, the powerful Chinese politburo pledged on Tuesday to keep economic operations within a reasonable range in 2022, whilst also promoting healthy developments in the property sector.

Chinese economic optimism is helpful for the Aussie given that China is Australia’s largest export destination. On which note, the Aussie also got a boost from the release of strong November trade figures out of China during Tuesday’s Asia Pacific session. Both imports and exports beat expectations “thanks to stronger demand and easing semiconductor shortages”, said Capital Economics, who added that the emergence of Omicron might offer further support for Chinese exports in the near term.

Hawkish RBA

Perhaps the most important factor boosting AUD on Tuesday has been hawkish interpretations of the latest RBA rate decision. As expected, the bank held interest rates at 0.1% and pledged to continue buying bonds at a A$4B weekly pace until February. But the bank, whilst conceding that Omicron was a risk to the outlook, said it did not think the new variant would derail the recovery.

The RBA has clearly positioned itself among those central banks (like the Fed) that do not currently see the new variant as likely to truly dampen the recovery and policy plan. With still a lot of short positions to be unwound, this is a notion that can continue to offer support to the Aussie dollar in the coming weeks. Meanwhile, a reference to inflation being expected to sit within the bank’s 2.0-3.0% range in 2023 was removed from the statement, which some analysts saw as the bank opening the door to an earlier rate hike.

AUD/USD continued its rebound overnight and peaked at 0.7123. Further offering interest is staggered to 0.72c while demand is expected should we drift back to the recent lows of 0.6995.

Event Risk Data Today

Canada: The Bank of Canada will keep policy on hold for now, although strong employment data continues to support expectations for rate hikes in 2022.

NZ: Finance Minister Robertson appears at a Finance & Expenditure select committee on Financial Statements.

Japan: In October, the current account surplus is expected to remain narrow versus the level of early 2021 (market f/c: ¥1274.9bn); meanwhile the final release of Q3 GDP should again highlight the weak state of domestic demand.

India: The RBI will keep policy on hold as they assess the uncertainties surrounding demand and inflation (market f/c: 4.0%).

US: Demand for cars is anticipated to buoy consumer credit in October (market f/c: US$25bn). JOLTS job openings for October should continue to reflect the extraordinary demand for workers (market f/c: 10469k).