RBA cautiously optimistic about Omicron
The RBA minutes from the December meeting were cautious but optimistic at the same time. Investors reacted to the minutes, which stated that the bank did not expect the Omicron variant to derail the economic recovery. Still, the bank noted that Omicron “posed additional uncertainty for the near-term outlook.” Given the disparity between RBA guidance and the markets’ expectations for a rate hike, this language is a signal that the bank has no intention of raising interest rates anytime soon.
The minutes reiterated that the bank would not hike rates until “actual inflation is sustainably within the 2 to 3 per cent target range.” The word “sustainably” is key, since underlying inflation has already reached 2%, but the bank can argue that inflation is not yet sustainably above 2%. Of course, it is the RBA that is the sole decisor of what constitutes “sustainable” inflation, which gives the bank plenty of leeway.
Investors were also encouraged by what the RBA had to say about QE. The minutes noted that the RBA would consider winding up its QE programme in February rather than May if economic conditions improved. This stance fits in nicely with the minute’s observation that the economy was rapidly recovering after the downturn due to Delta. If the recovery accelerates, we can expect the bank to bring forward its timeline on winding up QE, which will then shift market focus on a lift-off date for a rate hike.
The month of December is all about volatility, and the Australian dollar has already delivered on that front. Earlier in December, the Aussie gained a whopping 2.49% in just one week, its best weekly performance in 2021. Liquidity will be thin as we head towards the New Year, so markets participants should be prepared for further volatility from the Australian dollar. The markets have been jumping on every bit of news with regard to Omicron, and it will only take a headline about Covid to trigger a sharp reaction from the Australian dollar.
- There are support levels at 0.7069 and 0.7013
- AUD/USD faces resistance at 0.7203. The next resistance line is at 0.7281
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