• AUD/USD has reclaimed 0.7100 status on Tuesday amid a broad surge in risk appetite.
  • But strong Chinese trade data and hawkish interpretations of the latest RBA policy decision are also supporting the Aussie.
  • AUD/USD is threatening to break to the north of a key descending trend channel.

The Aussie dollar has continued to power higher throughout the session on Tuesday, moving to the north of the $0.7100 level in recent hours as risk appetite has continued to improve. That marks a more than 1.5% recovery from last Friday’s lows of just under 0.7000, with 0.9% of those gains coming on Tuesday.

AUD/USD is now challenging the upper bounds of a descending trend channel that has been suppressing the price action going all the way back to early November. A break above this descending trendline, which the pair is currently flirting with just above 0.7100, would open the door to a sharp rally to the next area of resistance around 0.7170, ahead of the 21-day moving average just under 0.7220.

Driving the day

The main driver of the recovery in broad risk appetite on Tuesday appears to be markets pricing out prior pessimism about the impact of Omicron on the economic outlook in light of growing evidence that infections are comparatively “mild”. But sentiment is likely also receiving a helping hand as Chinese authorities signal intent to provide support to the economy in 2022.

After its 50bps reserve ratio requirement cut on Monday, which is expected to release CNY 1.2T in liquidity from the Chinese banking system, the PBoC cut rates on its re-lending facility by 25bps with the aim of supporting the rural sector and small firms. Meanwhile, the powerful Chinese politburo pledged on Tuesday to keep economic operations within a reasonable range in 2022, whilst also promoting healthy developments in the property sector.

Chinese economic optimism is helpful for the Aussie given that China is Australia’s largest export destination. On which note, the Aussie also got a boost from the release of strong November trade figures out of China during Tuesday’s Asia Pacific session. Both imports and exports beat expectations “thanks to stronger demand and easing semiconductor shortages”, said Capital Economics, who added that the emergence of Omicron might offer further support for Chinese exports in the near term.

Hawkish RBA

Perhaps the most important factor boosting AUD on Tuesday has been hawkish interpretations of the latest RBA rate decision. As expected the bank held interest rates at 0.1% and pledged to continue buying bonds at a A$4B weekly pace until February. But the bank, whilst conceding that Omicron was a risk to the outlook, said it did not think the new variant would derail the recovery.

“The RBA has clearly positioned itself among those central banks (like the Fed) that do not currently see the new variant as likely to truly dampen the recovery and policy plan,” said ING. “With still a lot of short positions to be unwound, this is a notion that can continue to offer support to the Aussie dollar in the coming weeks” the bank added.

Meanwhile, a reference to inflation being expected to sit within the bank’s 2.0-3.0% range in 2023 was removed from the statement, which some analysts saw as the bank opening the door to an earlier rate hike. Famed RBA watcher Terry McCrann said “it is clear Australia is moving closer to a rate rise, not just potentially in 2023 but possibly even relatively early next year.”

This article was originally published by Fxstreet.com.Read the original article here.