The omicron scare began just after US Thanksgiving and led to two rough weeks for risk assets as markets weighed the extremely quick spread against the potential for severe infection. As it has become increasingly clear that infections are less severe, risk assets have recovered. The market is also sensing a changing of the tide around lockdowns and restrictions with a growing chorus of people saying it's time to live with vaccines and the virus.

I think AUD/JPY captures omicron clearly with a sharp fall, followed by a complete recovery.

AUDJPY daily

Should AUD/JPY go higher or lower from here?

The simple argument is that omicron fears are washed away. US stocks are at record highs so it should be right back to where it was. There's more going on below the surface though and I can see the argument for higher and lower.


The big omicron risk is China. The rest of the world can live with it but China is strictly enforcing covid-zero and that's a losing battle. Omicron is so transmissible that fighting it via full-scale lockdowns will be extremely disruptive to the global supply chain and growth, which will impact Australian exports. The time to buy AUD/JPY will be when China gives up and decides to let omicron spread.


The world is now ready to move on from covid. Yes, omicron could be bad and could even overwhelm healthcare systems, leading to a miserable few months. Despite that, people are largely deciding that the cost of locking down further is too high to bear for a variant that's unstoppable anyway. So everyone will get covid and hopefully that's enough natural immunity to live normally. The market can see through the short-term pain to a better future.

For now, I don't think there's a rush to make a decision. I'm keeping a close eye on climbing Chinese cases. Reports say the variant in Xian is delta not omicron but it's worth watching closely. Getting through the Olympics without covid in China is a monumental task. For now, let markets chop around in low, year-end liquidity.