Australian dollar posts slight gains

The Australian dollar is higher for a third straight day. AUD/USD is trading at 0.7145 in the North American session, up 0.37% on the day.

Aussie higher as Omicron jitters ease

The word ‘Omicron’ was causing fear and panic in the markets just two weeks ago, as the newest Covid variant raised fears of a new wave of Covid that might derail the tenous global recovery. Those fears have subsided to a great extent, as the market has suddenly taken a less frenzied view of Omicron, on the basis of data that shows that patients with Omicron have shown milder symptoms than with previous variants. Risk appetite has been on a roller-coaster track – falling sharply when panic set it, only to bounce back now that investors are no longer worried sick that Omicron will take down the global recovery.

Is Omicron really a mild event that we can put in the rearview mirror? It’s too early to tell, but the uncertainty over the newest Covid variant has resulted in significant volatility in the markets. The Australian dollar, a bellwether for risk sentiment, has shown strong volatility – the currency fell by 1.67% last week but has quickly recovered, with gains of 2.12% so far this week. Market participants should be prepared for the Aussie’s volatility to continue as more data is released and health officials learn more about the threat posed by Omicron.

At the RBA policy meeting, the bank cited Omicron as a new source of uncertainty but added that it should not derail the recovery. Omicron has emerged as a convenient crutch for the RBA, which has been looking to dampen market projections of a rate hike, which have been more hawkish than the bank’s guidance. I would expect other central banks that are under pressure to hike but have reservations, such as the BoE, to cite Omicron if they decide not to raise rates.

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AUD/USD Technical

• There are support levels at 0.6938 and 0.6875
• AUD/USD is testing resistance at 0.7118. The next resistance line is 0.7235

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