- AUD/USD bears push bulls onto the ropes.
- Risk-off supporting the bearish outlook for the open.
AUD/USD ended the week on the back foot, falling into highly negative territory from a technical basis and hurt by investors running for cover from the spread of the Delta variant.
Coronavirus has played a significant role in the recent risk-off environment for financial and commodity markets in recent weeks which has sunk the Australian dollar due to its ties to world growth sentiment.
COVID spread weighing on market’s risk appetite
On Friday, AUD/USD ended down 0.35% falling from a high of 0.7442 and fell to a low of 0.7392, (a fresh 2021 low), extending its monthly decline from the 0.78 area.
Meanwhile, solid US data and a shift in interest rate expectations after the Federal Reserve flagged in June sooner-than-expected hikes in 2023 have put a floor under the greenback.
The dollar index DXY, which measures the greenback against a basket of six currencies, was ending 0.16% higher at 92.712. The index is up 0.6% for the week.
The gains came despite Fed Chair Jerome Powell reiterating on Thursday that rising inflation was likely to be transitory and that the US central bank would continue to support the economy.
For the open
It is a quiet week on the calendar, apart from what would be expected to be dovish minutes from the very dovish July Reserve Bank of Australia meeting. Therefore, external factors would be expected to be in play.
Combining the risk-off mood pertaining to the spread of the delta variant from the weekend and the fact that AUD/USD failed to break above 0.7500 earlier last week, even when global sentiment appeared favourable, the bias is firmly bearish.
Moreover, yet another five-day lockdown in the state of Victoria was recently imposed and the latest headlines suggest it could be extended.
Daniel Andrews, premier of Victoria, says the restrictions won’t go any longer than they need to but at this stage, he has no advice to shorten lockdown for any areas outside Melbourne either.
On the other hand, while the net-short positioning could leave the currency exposed to a short squeeze, leading the spot market to potentially rebound, the unattractive carry compared to, say, NZD, NOK or CAD, may make it a laggard in this regard.
By Ross J Burland for FXStreet