Australian Dollar Outlook: AUD/USD Back On the Offensive As Covid Restrictions Ease

Although the Australian Dollar appears to be back on the offensive, it is still much lower than the US dollar since February.

Australian Dollar Outlook: AUD/USD Back On the Offensive As Covid Restrictions Ease

However, weakness has slowed since 2021. This is despite another disappointing Australian labor markets report. After a surprise -138k job loss in September, Australian employment levels have fallen to pre-pandemic levels.

Could the Australian dollar be stabilizing? It's possible. The chart below explains why. As metals like iron ore and copper rose, the commodity-linked currency couldn't capitalize on the positive market sentiment earlier in the year. The Australian government bond yields experienced a significant pullback, which reduced the currency's appeal.

To help control the Delta Covid-19 variant, the nation also entered lockdowns. This negatively affected economic growth expectations and is now being felt on the labor market. However, markets are looking forward. Australia is slowly easing its lockdowns. Covid restrictions in Sydney were removed this week. Melbourne will be the next stop.

We could see an increase in growth expectations as Australia appears to be moving forward with its reopening. The situation is still fluid. Covid cases are rising as more parts of the country open up. The sentiment-sensitive currency could be vulnerable to a reintroduction or suspension of lockdowns.

The economic agenda for the week ahead is quite light. Minutes of the RBA meeting are available. This week will also start with data on the third quarter of China's GDP. China is Australia's biggest trading partner. Weaker growth could have a negative impact on the local economy. To combat power shortages, China is slowly buying back Australian coal. India is also taking advantage of Australian coal idle at Chinese ports.

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