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FX market on the mend after Friday swings

Key factors driving FX market:     

The new Omicron coronavirus strain has been discovered, which could be vaccine-resistant.

The yen, franc, euro and USTs acted as defensive assets.

Major currencies saw mixed performance heading into the weekend. The steepest losses were seen in the New Zealand dollar (-1.03%), the Australian dollar (-1.41%), the Canadian dollar (-0.76%), and the British pound (-0.78%). On the other side of the spectrum, the single currency (+1.42%), the Swiss franc (+0.98%), and the Japanese yen (+0.41%) posted gains.

The EURUSD pair rose 0.97% to 1.1318 on Friday, November 26. The single currency strengthened, whereas the Canadian, New Zealand and Australian dollar traded lower. The backdrop for the pullback in many currencies, cryptocurrencies, oil and stock indices was the report of a new strain of the coronavirus (B.1.1.529.), which could be a ‘vaccine-escape’ variant. Concerns over a new hit to the global economy curbed the appeal of risk-sensitive assets for investors.

One may legitimately question why the euro strengthened and the dollar weakened on the back of negativity regarding the new Covid strain. The dollar is also a defensive asset.

The euro, like the yen, is a low-yielding currency. Carry trade funds were borrowed in it due to low interest rates. Accordingly, risk aversion triggered a buyback of the euro.

The dollar fell while the UST10Y yield fell. If the new Covid-19 variant does start to spread rapidly around the world, it could damage the recovery of the global economy. For this reason, the US dollar would become vulnerable as the Fed might roll back the timeline for raising rates. In light of Omicron, investors expected the first rate hike to be postponed from June to September.

Meanwhile, ECB Vice-President Luis de Guindos said on Friday that despite concerns about the new strain of the virus, he thinks the economic impact will be lower than in the past. De Guindos added that he believes the economic impact will not be comparable to the results seen a year or two ago given that the economy has adjusted to the constraints.

Today’s macro agenda (GMT+3) 

  • 12:30 UK: mortgage lending (October); net lending to individuals (October)
  • 16:30 Canada: current account (3Q); PPI (October)
  • 18:00 US: pending home sales (October)
  • 20:15 EU: ECB President Christina Lagarde speech
  • 22:00 Canada: BoC Governor Tiff Macklem speech
  • 23:00 US: New York Fed President John Williams speech
  • 23:05 US: Fed Chair Jerome Powell speech

Current outlook

Risk assets have been rebounding in Asian trading, including those impacted by news of the new Covid-19 strain. The demand for risk assets rose after positive news from Israel’s Prof. Dror Mezorach, head of the coronavirus department at Hadassah Ein Karem University Hospital, who tweeted that preliminary reports on the clinical condition of people infected with the new variant are encouraging.

The focus of traders has shifted to speeches by central bank heads and representatives of the US Federal Reserve. Lagarde and Powell are scheduled to speak later today. If Powell voices serious concern about the new strain, risk-sensitive assets will come under pressure again. Notably, greater understanding about the impact of the new virus strain on the markets should be forthcoming later this week.

Technical analysis

The euro jumped to $1.1331 on Friday. Growth stopped between 112-135-degree angles of the Gann fan. The morning correction totaled 45 degrees. The market environment remains uncertain as it will take some time to get a handle on the impact of the Omicron variant. The market will continue to experience swings over the next few days. The highlight of the week will be non-farm payrolls (NFPs) due out on Friday.

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