AUD/USD continues to trade heavily in mid-0.7100s, afer probing 0.7100 level earlier in the session

• AUD/USD is consolidating in the mid-0.7100s having nearly hit the 0.7100 level earlier in the session.
• The pair is on course for steep daily losses amid heightened pandemic fears.
• A break of 0.7100 could see the pair drop quickly to 0.7000.

AUD/USD tumbled below key support in the form of the late September low at 0.7170 on Friday and eventually fell as low as 0.71125, as risk assets were pummeled amid a spike in pandemic-related fears. The pair has since recovered back to close to 0.7140, but still trades with losses of about 0.7% or 50 pips on the day and is on course to end the week down 1.2%.

For now, dip-buying and profit-taking on previous short positions have kept AUD/USD above support in the 0.7100 area. Should this support break, a run towards the next key area of support around 0.7000 is likely.

Concerning new variant

The latest data out of South Africa regarding a recently discovered new Covid-19 variant has caused global health authorities and the scientific community highly concerned. There is a chance that 1) the variant might be more virulent than the delta variant and 2) the variant might be vaccine-resistant. According to the scientists who have sequenced the variant’s genome, it has a high number of mutations to the spike protein (the part the mRNA vaccines are designed to target). According to some in the scientific community, it is the “most evolved” variant yet discovered from the original virus.

Risk-off, Aussie lower

Thus, a major theme in the news on Friday has been various countries around the world reimposing travel restrictions to South Africa and other nations known to house the new variant. Market participants have been dumping risk assets out of fear that not only travel restrictions will hurt the global economic recovery, but also that the countries may be forced into further lockdowns again if the new variant is as dangerous as feared.

The Aussie is thus not a good asset to hold in these conditions, given its historic strong correlation to risk appetite and the Australian economy’s exposure to global economic conditions. Moreover, industrial metals took a beating on Friday amid fears of a global economic slowdown, with the Bloomberg Industrial Metals subindex (BCOMIN) lurching 3.8% lower. The export of industrial metals and their ingredients such as copper and iron ore are key for the Australian economy.