FX Daily: Fears still lurk behind hopes


Monday was considered a relief rally.
Philip Wee07 Dec 2021
    Photo credit: Unsplash Photo


    Investor jitters subsided with Omicron fears and China’s required reserve requirement cut. Dow, S&P 500 and Nasdaq Composite rallied 1.9%, 1.7% and 0.9% respectively in the overnight session. Attention turned to the Federal Reserve which is expected to step up the pace of tapering of asset purchases at the FOMC meeting on 15 December. The US 10-year treasury yield rose 9.1 bps to 1.434% and lifted the USD index (DXY) by 0.1% to 96.3. The improved risk appetite was reflected by the depreciation in negative-yielding currencies such CHF (-0.9%), JPY (-0.6%) and EUR (-0.3%) and the appreciation in commodity currencies such as AUD (+0.7%) and CAD (0.7%). 

    Monday was considered a relief rally. Dow did not close above the opening level (35,367) of the sell-off on 26 November. Stock market futures are flat after the rebound in the overnight session, wary of a repeat of last week’s ups and downs from the hopes and fears over Omicron. Although “a bit encouraged” that Omicron might not be as severe as Delta, White House’s chief medical officer Dr Anthony Fauci acknowledged this remains conjecture on preliminary data. EU is discussing whether to ease travel curbs to South Africa where hospitalizations have yet to surge with Omicron cases. South Africa is taking no chances and is preparing its hospitals for more admissions. Europe is also increasing measures to contain the spread of Covid-19 infections ahead of Christmas. Health experts continued to warn against complacency on unsubstantiated conclusions over Omicron.

    Apart from FOMC, attention will also fall on the European Central Bank and Bank of England meetings on 16 December. Like Omicron, it is too early to conclude if the BOE would refrain from a rate hike. Although BOE hawk Michael Saunders might abstain from voting for a rate hike on Omicron, BOE Deputy Governor Ben Broadbent sees inflation exceeding 5% in April and monetary policy working with a lag to bring inflation back to target. ECB will decide on its pandemic emergency purchase programme scheduled to end in March 2022 but is unlikely to decide on bond purchases after that. Until it gets more clarity on Omicron, ECB might need to show sufficient concern over above-target inflation first. Overall, the situation remains too fluid for any significant trends to emerge that last.

     



    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]


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