Downside risks for the Australian dollar have eased in the near term, point out analysts at MUFG Bank. They warn is still too early to build long positions.

Key Quotes:

“The recent turnaround in fortunes for the AUD has been driven both by positive domestic and external factors. On the external side, the AUD has derived support from the easing back of initial fears over potential disruption to the global economy from the new Omicron variant. Market participants appear to making the assumption that economic disruption will prove short-lived as the new variant spreads more rapidly and is potentially less severe. At the same time, the AUD has derived support from the recent policy shift in China which has helped to ease concerns over the risk of a sharper slowdown from weakness in the real estate sector.”

“Domestic developments have also been favourable for the AUD. It has been revealed that GDP contracted less than expected in Q3 in response to the lockdowns, and the economy is now bouncing back strongly. The unemployment rate had already dropped back sharply in November to a low of just 4.6% and is well below pre-pandemic levels. It has further reinforced speculation that the RBA will speed up plans for tightening policy at their next meeting in February. The release next week of the minutes from this month’s RBA meeting could provide greater clarity over whether the RBA will even end QE immediately in February.”

“We believe that downside risks have eased for the AUD in the near-term. However, it is still premature to start building long AUD positions given downside risks are still posed by Omicron and the China real estate slowdown.”

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