Monthly Wrap – AUD – Australian dollar infused with volatility by mixed market sentiment

By Philip McHugh on January 19, 2022

Key takeaways:

• Australian dollar finds support on iron ore rally, Christmas optimism and Chinese data.
• Gains are reversed on low risk sentiment and wage stagnation.
• AUD Monthly lows: £0.53, $0.71, €0.63, NZ$1.05, C$0.90
• AUD Monthly highs: £0.54, $0.73, €0.64, NZ$1.06, C$0.93

The Australian dollar (AUD) trended higher in the week to Christmas, despite confirmation from the Reserve Bank of Australia (RBA) that it intended to hold its key interest rate at a record low. A bearish market mood failed to suppress ‘Aussie’ sentiment as iron ore rallied.

While experts warned that the Omicron variant seemed more transmissible than earlier strains of the virus, news that it caused milder symptoms supplied further support to the currency.

As Christmas Eve approached, AUD enjoyed a Santa rally: the ‘Aussie’ seemed little affected by staff shortages affecting airlines.

Between Christmas and the New Year, the currency traded in a mixed range: optimism over new Covid freedoms was tempered by rising case numbers.

Meanwhile, forecasts predicted that iron ore exports could be pressured in 2022, subduing AUD; but upbeat data from China capped losses.

At the beginning of January, the ‘Aussie’ peaked against several peers as optimism in the Chinese property markets underpinned AUD support. The RBA’s chart pack made for mixed reading, celebrating higher commodity prices while acknowledging wage stagnation.

The Australian dollar subsequently fell as expectations for multiple rate hikes from the Federal Reserve in 2022 weakened market risk appetite.

Turning to the coming month, the Australian Dollar is likely to be influenced by employment data, business confidence and AU inflation. The country’s trade balance and service-sector activity may also affect AUD exchange rates, with a widening of the nation’s trade balance potentially supporting the ‘Aussie’.

More importantly, however, the RBA will announce its interest rate decision at the beginning of February. The central bank is expected to leave rates unchanged – but a hawkish tone could still support the Australian Dollar.

Elsewhere, risk sentiment could sway ‘Aussie’ trading, alongside commodity prices and Covid dynamics.