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]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. 

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.