The Australian dollar is growing on increased risk appetite, pushing new highs. However, it could be a short-term rise, analysts warn.
AUD started the week on an uptrend and extended it on Tuesday, making the biggest gains in six weeks. AUD/USD added 0.6% on Tuesday and reached 0.7091. The rally was triggered by the meeting of the Reserve Bank of Australia, which left the key interest rate at the record low level of 0.10%. On Wednesday, the Australian currency reached the weekly high on increased risk appetite. AUD/USD slightly rebounded but remained on the upswing, hovering near 0.7135.
The Australian dollar rose on positive news regarding the new Omicron strain of COVID-19, which could be less severe than previously anticipated. According to Philip Lowe, governor of the Reserve Bank of Australia, the emergence of Omicron is "a new source of uncertainty", but it won't obstruct the economic recovery.
A preliminary outlook suggests that Australian economy would reach pre-pandemic levels in the first half of 2022. By downplaying Omicron risks, the regulator hinted at an earlier interest rate hike. Earlier, the RBA warned it would not raise the rate until 2023. The markets have already priced in a possible rate hike, as market players expect a change in monetary policy by July 2022.
Improving business sentiment in Asia and rising iron ore prices also gave support to the Aussie. AUD was also boosted by improved outlook of the Reserve Bank of Australia on economic recovery. According to Philip Lowe, household consumption and the labor market are expected to recover by the end of 2021, along with a further rise of salaries and increased investments.
The high level of vaccination in Australia and the resulting collective immunity is the likely reason to Omicron's low impact on the Australian economy. As a result, the country could avoid new lockdowns and put its economy back on track.
Decreasing unemployment is another positive factor for Australia - in November, the amount of job vacancies exceeded the pre-pandemic level by 44%. An outlook by ANZ sees unemployment fall to 4% by the end of 2022, while wages growth would rise to 3%. Thanks to relaxed quarantine measures boosting the Australian economy, the amount of job vacancies soared by 7.4% in November, as companies actively increased their spending.
AUD has also found support in rising inflation expectations. The RBA expects inflation to reach 2.5% in 2023. Currently, the base inflation rate is near the lower end of the inflation target range of 2-3%. Given the current situation, the regulator is open to revising its bond buying program, as well as potentially cancelling it in February 2022. The end of QE stimulus and positive economic trends push the Australian dollar up.
