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In our FX review this week we focus on the discovery and alarm surrounding the new Covid variant, known as B.1.1.529. Although we don’t think we can revert to the early 2020 FX playbook to mirror moves in coming weeks, there are some similarities that could present some opportunities.

It started as a normal week

Much of the week was focused around the continuation of the story from previous weeks, that of USD strength. Until Friday, US yields were supportive of a stronger dollar, with lower yielders suffering the most. For example, EUR/USD printed fresh year to date lows as it traded below the 1.1200 handle, and USD/JPY broke and held above 115.

It looked like this move would continue, with some analysts pointing towards 118 as a next stop for USD/JPY on the basis of the technical break above 115. However, this all changed overnight on Thursday, and when London walked in on Friday the picture was very different.

The main news that shocked FX markets was the alarm being seen around a new Covid variant from South Africa. It’s been seen as more resistant to the vaccine and also more contagious and deadly. With cases being reported in Hong Kong, it’s unknown how fast or how far this variant has already spread to.

Movers of note on Friday

In terms of knee-jerk reactions, the South African Rand took a hit, down circa 2% versus the US Dollar. With oil also falling 5% on Friday morning, commodity currencies such as CAD and AUD lost ground. Both CHF and JPY strengthened with safe haven flows.

USD/JPY traded 1.5% lower on the day, closing at 113.41. We feel this move was also accelerated due to stops being triggered on the downside, with many premature longs being placed earlier in the week.

Both EUR and GBP actually performed better off versus USD, with GBP/USD recording a bullish outside day to close in the mid 1.33’s. For the EUR, it was being used as a funding currency (discussed in previous FX reviews). With people wanting to scale back on the risk, this meant buying back EUR to close out positions. This meant that overall, EUR gained on Friday against most peers (bar CHF and JPY).

Trading opportunities ahead

The march 2020 playbook would suggest getting long EUR as more unwinding of positions could happen in weeks to come. It could also suggest more pressure on CAD and AUD. 

However, we are cautious about reading too much into last year. The situation is fundamentally different. We do have a vaccine now, and are much better prepared to adapt to life under restrictions if needed. Therefore, we think that the size of any moves in the FX market isn’t going to be as large as was seen last year.

Therefore, we’re being much more selective in what we choose to put on. We like being long GBP/USD, and do also see value in being long EUR. With our EUR/CHF trade stopped out on Friday, playing this via long EURCAD looks the best option.

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