AUD tests new lows as resistant Covid strain and faster Fed taper crush risk appetite

AUD - Australian Dollar

The Australian dollar tested new lows through trade on Tuesday, falling through 0.71 US cents before recovering into this morning’s open. Risk sentiment faltered following comments from the Moderna CEO on the likely efficacy of current vaccines against the Omicron variant. Mutations on the spike protein could allow this strain to bypass the immunity afforded by existing inoculations, with any correction engineered to fight this particular variant likely several months away at best. The AUD gave up 0.7130 following the commentary, testing 0.71 before another pharma CEO afforded a slightly more optimistic picture, suggesting existing vaccines will still protect against severe disease but the likelihood of contracting the virus while immunised was now higher. Markets recovered on this news, pushing above 0.7150 to touch 0.7170 before hawkish commentary from Fed Chair Jerome Powell sent the AUD tumbling lower again amid a second risk correction. Powell acknowledged inflation had spread more broadly across the domestic economy, and it was no longer fair to describe price pressures as transitory, proposing a faster pace of QE tapering was appropriate. These comments prompted a sharp correction across risk assets, driving equities lower and the USD higher. Driven toward intraday lows at 0.7070 the AUD sell off faded into this morning and the AUD now buys 0.7130 US cents. Our attentions remain with developments and updates surrounding the Omicron variant and ongoing expectations for Fed monetary policy.

Key Movers

A heightened sense of volatility plagues price action across currency markets overnight, with the USD testing new highs before paring gains and closing lower on the day. Risk sentiment ebbed and waned as commentary from Pharma CEO’s prompted markets to adjust bets as to the broader impacts of the Omicron variant on the Global Economy, while comments from Fed officials suggesting a faster path to interest rate hikes drove risk assets lower. The JPY outperformed, forcing the USD back toward 113, well off last week's high above 115. Volatility indexes have spiked higher, marking highs not seen since March and increasing the likelihood of larger swings across the coming weeks. Economic data has taken a step back in the current environment as our attentions remain affixed to broader bets surrounding the impact of the Omicron variant.

Expected Ranges

AUD/USD: 0.7020 - 0.7170 ▼

AUD/EUR: 0.6230 0.6330 ▼

GBP/AUD: 1.8580 - 1.8780 ▲

AUD/NZD: 1.0380 - 1.0490 ▼

AUD/CAD: 0.9070 - 0.9150 ▼