FX Daily: A game of snakes and ladders


Omicron uncertainties keep risk appetite at bay
Philip Wee02 Dec 2021
    Photo credit: Unsplash Photo


    S&P 500 opened 0.8% higher only to end up reporting its worst two-day rout since October 2020. The initial two-hour rally followed through from the positive sessions in Europe and Asia. Apart from conjectures that Omicron might be milder, sentiment was also underpinned by an improvement in the US ISM manufacturing PMI to 61.1 in November from 60.8 in October, and a decent 570k reading in the November ADP Employment report. Investors dashed for the exit on the first Omicron case detected in the US.  By the end of session, S&P 500 fell 1.2% while the Dow and Nasdaq Composite fell more by 1.3% and 1.8% respectively. 

    Similarly, the bond market aborted an attempt to take the US 10-year treasury yield above 1.50% on Powell’s pivot. During his testimony to the US Senate Banking Committee on Tuesday, Fed Chair Jerome Powell dropped the “transitory” tag for inflation and signaled more discussions regarding accelerating tapering asset purchases at the FOMC meeting on 14-15 December. The long bond yield tumbled to 1.404%, its lowest close since 23 September. The Fed’s Beige Book, which presented information gathered before Powell’s pivot and Omicron, did not provide new insights. WTI crude oil prices also tumbled with US stocks to USD66.40 per barrel, down 6.7% from the session’s high of USD69.50.

    Against the negative yielding currencies (JPY, CHF and EUR), the USD is more vulnerable to downside risks from Omicron than upside risks from Powell’s pivot. For example, USD/JPY closed below 113 for the first time since 9 November, is capped at 113.40 (50-day move ave) and could drop to 111.60 (100-day mov ave). Commodity currencies are defenseless whenever stock markets are gripped by sell-offs. AUD and NZD face more downside risks if they fail to hold their psychological support levels at 0.71 and 0.68 respectively. USD/CAD could extend higher if it succeeds in breaking decisively above 1.28 after two failed attempts in August and September. In Emerging Asia, weaker risk appetite and lower JPY crosses undermine carry trades in IDR and INR. Understandably, the tourism-led THB did not recover from travel restrictions and border closures on Omicron. For now, things could get worse first because more weeks of data will be needed to ascertain if Omicron is deadly or mild.  Until then, the more contagious variant likely to spread to and within more countries. The risk of more countries joining Austria in ordering lockdowns cannot be ruled out. Overall, Omicron is becoming a game of snakes and ladders.






    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]


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