Australian dollar edges higher

It has been a fairly quiet Christmas week for the Australian dollar. Currently, AUD/USD is trading around 0.7260. This week is marked by a dearth of tier-1 events, and risk sentiment has been fairly steady. The equity markets are humming, with the S&P 500 and Dow Jones posting record highs, while the safe-haven US dollar is broadly lower as risk tolerance remains elevated.

Markets remain positive despite Omicron wave

What has characterized this week is the positive mood in the markets, despite some headlines which could point to trouble ahead. First, there is the explosion in Omicron, with the US and France setting an all-time record for new cases.  Governments are scrambling to deal with this newest Covid wave, as hospitals could be overrun by unvaccinated persons becoming infected. The markets, however, continue to rely on reports that Omicron is much less severe than Delta and will not cause the economic damage that we saw with Delta.

Another crisis is Evergrande, the giant Chinese real estate developer, continues to struggle with a staggering debt of over USD 300 billion. The company missed two offshore bond payments earlier this week and the company’s shares and debt are trading at record lows. If Evergrande were to fail, the collapse would likely send shock waves across China’s property sector and this could weigh on the Australian dollar, as China is Australia’s largest trading partner.

The Federal Reserve has taken a hawkish pivot in recent weeks after it was forced to abandon its view that inflation was transitory. The Fed recently doubled the taper of its bond purchase programme, which is now scheduled to end in the spring rather than mid-2022. Fed policymakers are expected to raise interest rates soon after the bond purchases end, with the market pricing in three rate hikes in 2022.

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AUD/USD Technical

• 0.7288 has held in resistance since mid-November. The next resistance line is at 0.7354
• There is support at 0.7119 and 0.7016

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