AUD/USD slips back under 0.7250 as stocks slide, traders fret Omicron impact on Aussie economy

A broadly risk-off market tone that has seen global equity markets turn lower for a second day on Thursday seems to be taking its toll on the Aussie, as well as potentially some domestic Australian pandemic woes. The underperforming AUD has now dropped more than 0.6% on the day versus the US dollar, with AUD/USD recently dipped below 0.7250, as traders mull the economic impact of surging Omicron infections and whether it will have any bearing on upcoming RBA policy decisions.

This week’s Australia November Retail Sales report showed a much stronger than expected rebound as the Australian economy continued to open up from its Q3 lockdowns, solidifying expectations that, prior to the rapid spread of Omicron, Australia’s economy had been growing strongly. However, after reaching record-high levels in December, Westpac said on Friday that card spending in the country had fallen sharply in the first two weeks of January. The RBA views Omicron as unlikely to derail Australia’s economic recovery, but recent weakness might encourage them not to abruptly axe their QE buying in February and rather instead opt to taper and continue purchases to May.

The above expectations that the current economic weakness may translate into a more dovish RBA outcome may well be one of the factors weighing on AUD on Friday alongside the generally more risk-off tone. In terms of the dollar side of the AUD/USD equation, the pair saw very little reaction to the latest (weaker than expected) US Retail Sales report and (weaker than expected) Industrial Production numbers. Broadly speaking, the US dollar remains on a fragile footing despite this week's hawkishness from FOMC members and hot consumer and producer inflation metrics. That suggests upcoming University of Michigan Consumer Sentiment survey data (the preliminary January release) is unlikely to generate much by way of FX market volatility, but will be worth watching nonetheless.