Why the recovery in the AUDUSD can continue

The undoing of the AUDUSD rally, the continued repricing higher of the U.S. interest rates curve, which now has almost 150bp of hikes priced until the end of 2023, ahead of next week's Federal Reserve meeting.

Along with Omicron disruptions and elevated Russian - Ukraine tensions, highlighted by the weekend's cyber-attack on several Ukrainian government department websites.

On the other hand, key commodity prices remain strong. Following the dovish shift by the Chinese central bank at the start of December, iron ore has rallied 30% to near $130 p/t, and coking coal is trading at record highs.

In the first two weeks of 2022, China announced more than 3 trillion yuan ($471 billion) of infrastructure projects, an amount that is expected to increase after pollution controls for the Beijing Winter Olympics ease at the end of February.

To ease the downside risks from Omicron lockdowns and the government-induced slump in the real estate sector, the PBoC surprised the market today to cut its key 1 year interest rate by 10bp to 2.85% for the first time since April 2020.

Locally, the jobs report for December to be released on Thursday is likely to show a gain of around +60k jobs following November’s +366k increase. In early February, the RBA is expected to taper its QE purchases in February from A$4bn/week to A$2bn/week.

The cross currents outlined above are likely to see a continuation of the two step forward, one step back like recovery in the AUDUSD that commenced from the December .6993 low.

To monetarise this view, we favour buying the AUDUSD on a dip back towards support at .7160/30 with a stop loss placed below .7070. The first target for the trade is a retest of last week's .7314 high before the 200-day ma at .7420.

Source Tradingview. The figures stated areas of January 17th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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