In our FX review this week, we look at how the Omicron virus is impacting the currency markets. Aside from this trend, we also talk through the choppy month end flows that saw a strong USD bid, and comments from Saunders (BoE MPC member) that hit GBP.
Still too early to call
The Omicron strain of Covid-19 continued to bother financial markets this week. Headline tennis saw participants constantly trying to reprice expectations of the severity going forward. News of the first case in the US had a negative impact, as well as news late in the week that half of the cases in the UK were from double vaccinated people.
The net tone was definitely negative, although there were also positive headlines. These included comments from some vaccine manufacturers that although the vaccine is likely less effective against the new strain, it shouldn’t be materially lower.
From FX markets, we saw JPY and CHF well bid to start the week. We did see USD post gains towards the end of the week, but this was limited as UST yields fell, stunting potential gains.
Interestingly, we also saw a strong bounce back in ZAR crosses. USD/ZAR opened the week around 16.3 but traded below 15.8 before the late spike in USD on Friday saw it close at the 16.0 barrier. From a technical point of view, the weak Rand was exacerbated in recent weeks with the discovery of the new variant, pushing it to oversold territory. The retracement made sense, although we struggle to see how the Rand can produce further gains in coming months.
Saunders spooks GBP
On Friday, we saw GBP sell off as MPC member Saunders commented that it might be wise to see how Omicron plays out before making a decision regarding monetary policy. Saunders is seen as one of the most hawkish members on the committee. So with his comments making it sound like he won’t vote for a rate hike later this month, it doesn’t bode well for the rest of the committee.
More dovish members will likely not vote for a hike anyway, making it look more and more uncertain for any kind of rate hike this year. Given that GBP had priced in a hike, as expectations reduce, so should the value of GBP.
We saw this on Friday, but it’s finely poised for positioning in coming weeks before the meeting on December 16th. We’re currently long GBP/USD at 1.3330 from a couple of weeks back and are monitoring this closely.
Month end flows and looking ahead
There was high volume being put through the markets on Tuesday, coinciding with month end. This was weighted towards buying USD, but this triggered a lot of false breaks in pairs, with most of these moves retracing quickly on Wednesday.
In terms of new trade ideas, we still favor being selectively long USD, but don’t see much more upside for the safe havens. If Omicron news doesn’t materially worsen next week, being tactically long USD/JPY and USD/CHF could offer good risk reward metrics.
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