Australian Dollar Outlook: AUD/USD Back on the Offensive as Covid Restrictions Ease

The Australian Dollar is seemingly back on the offensive, but it remains much lower against the US Dollar since February. Still, gains in the Aussie have meant that weakness since earlier in 2021 has slowed. This is despite another disappointing Australian labor market report. Following an unexpected -138k loss in jobs during September, Australian employment levels are back below pre-pandemic points.

Might the Australian Dollar be stabilizing？ It is possible. To explain this, have a look at the chart below. The commodity-linked currency was unable to capitalize on rosy market sentiment earlier this year as metals - such as copper and iron ore - rose. During that time, there was a meaningful pullback in Australian government bond yields, reducing the appeal of the local currency.

Moreover, the nation entered lockdowns to help tame the Delta Covid-19 variant. That negatively impacted economic growth expectations, now being felt in the labor market. But, markets are forward looking. Australia is now gradually unwinding lockdowns. Covid restrictions were relaxed in Sydney this past week, and Melbourne is up next to start the week.

With Australia now seemingly moving forward with reopening, we could begin to see upward revisions to growth expectations. Still, the situation remains fluid. As parts of the nation open up, Covid cases are on the rise. A reintroduction of lockdowns risks derailing optimism, which is something the sentiment-sensitive currency could be left vulnerable to.

In the week ahead, the economic docket is fairly light. RBA meeting minutes are on tap. The week also starts off with third-quarter Chinese GDP data. China is Australias largest trading, softer growth risks negatively reverberating into the local economy. Still, China is gradually buying Australian coal again to combat power shortages. India is also capitalizing on Australian coal idling at Chinese ports.

AUSTRALIAN DOLLAR VS. MSCI WORLD INDEX, BBG COMMODITY INDEX FUTURES AND AU BOND YIELDS