Omicron continued to dominate risk sentiment this week, traders briefly focused on the slew of monetary policy statements from the major central banks.
Overall, it was another week where we saw safe havens outperformed, but the top spot went to the British pound thanks to a surprise move from the Bank of England.
Notable News & Economic Updates:
State Bank of Pakistan increases key target rate by 100 bps to 9.75%; raises FY22 inflation forecast to 9%-11%
Oil dips to $70 this week as Omicron concerns dominate
Asian Development Bank cuts Asia GDP outlook as new variant poses risks
Federal Reserve accelerates bond tapering, hints at two to three rate hikes in 2022
Bank of England surprises market with an 8-1 vote to raise interest rate from 0.10% to 0.25%
ECB to slow down Pandemic Emergency Purchase Program (PEPP) buys until it ends in March but temporarily double its Asset Purchase Programme (APP) purchases to aid transition
Study from Imperial College London warns that Omicron variant can get around previous covid infection
Study from Hong Kong University showed that omicron variant replicates 70 times faster in human airways than delta variant
Mexico’s central bank hiked interest rate by 50 basis points to 5.50%
Federal Reserve Governor Christopher Waller says rates may rise as early as March 2022
Intermarket Weekly Recap
Dollar, Gold, S&P 500, Oil, Bond Yield, Bitcoin Overlay 1-Hour
Risk aversion was the name of the game this week, fueled by a rising stream of pandemic related developments around the world. From a record number of new cases since the pandemic began in the U.K., to tightening restrictions across Asia, and reports of Omicron’s higher transmission abilities, the odds are rising that this newest variant could damage economic growth in the coming weeks and months.
With all of that going on, traders also had to prepare for the world’s top central banks as the Federal Reserve, Bank of England, European Central Bank and Bank of Japan gave their final monetary policy statements of the year. Most notable from that basket of events was arguably the Bank of England, who some thought would hold off on raising rates due to the Omicron variant spreading quickly in the U.K. But instead, they raised interest rates due to persistent inflation pressures and a tightening labor market.
The Federal Reserve sparked a broad market volatility on Wednesday as risk assets popped higher with a layer of global macro uncertainty passing after the event. It’s also possible that with the Fed still providing monetary support through Q1 2022 (and leaving the door open for more support if needed), traders were confident to take on more risk after the event.
But by the end of the week, risk aversion behavior prevailed as traders likely refocused on the pandemic, and possibly on the fact that interest rates will tighten in the U.S. and U.K., a scenario that could slow down economic growth along with the pandemic. Equities, bond yields, oil and crypto are all ending the week in the red, while the U.S. dollar and gold prices are set to close the week in the green.
In the forex market, this translated to another week of outperformance by the safe haven major currencies, with the British pound joining topping that group thanks to positive economic updates from the U.K. and the interest rate hike from the Bank of England. The Canadian dollar took the bottom spot despite strong inflation & jobs data from Canada, suggesting that broad negative risk sentiment and falling oil prices were likely the main drivers for CAD’s under performance once again.
USD Pairs
Overlay of USD Pairs: 1-Hour Forex Chart
U.S. Producer prices increase 0.8% m/m in November; soar 9.6% y/y
Congress passes debt ceiling increase, sending it to Biden to avoid default hours before deadline
U.S. Retail Sales: +0.3% in November; October revised to 1.8%. Core Retail sales: +0.2%
Fed will aggressively dial back its bond buying, sees three rate hikes next year
December Flash US Manufacturing PMI at 57.8 vs. 58.3 in November
GBP Pairs
Overlay of GBP Pairs: 1-Hour Forex Chart
UK declares ‘Omicron emergency’, to give booster shots to all above 18 from this week
Rightmove: number of U.K. homes for sale falls to record low in December
U.K. took £12.6B Brexit hit on trade in October
U.K. claimant count down by 49.8K vs. projected 31.5K drop; U.K. average earnings index down from 5.9% to 4.9% vs. 4.6% forecast
BoE votes 8-1 to raise UK interest rates to 0.25% from 0.1%
U.K. Flash Composite Output Index falls to 53.2 in December vs. 57.6 in November
UK retail sales by 1.4% in Nov (+0.8% expected)
EUR Pairs
Overlay of EUR Pairs: 1-Hour Forex Chart
Germany’s wholesale inflation at record high (+16.6% y/y) in November
Eurozone industrial production rose by 1.1% vs. 1.2% consensus
Spain November inflation remains at 29-year high, pushed by food and fuel costs
European Central Bank cuts pandemic bond buying, but pledges further stimulus
December Flash Eurozone Manufacturing PMI falls to a 10-month low of 58.0 vs. 58.4 in November
Germany Producer prices in November 2021: +19.2% on November 2020
Ifo institute said Germany business climate index fell to 94.7 in December from a revised 96.6 in November.
November Annual inflation up to 4.9% in the euro area; Up to 5.2% in the EU
ECB officials warn of inflation shift as upside risks mount
CHF Pairs
Overlay of CHF Pairs: 1-Hour Forex Chart
Swiss Producer and Import Price Index rose by 0.5% m/m to 105.2 in December
Economists Call for Swiss National Bank to Create $1 Trillion Sovereign Wealth Fund
Swiss National Bank sticks to loose policy, diverging from Fed and others
CAD Pairs
Overlay of CAD Pairs: 1-Hour Forex Chart
Bank of Canada renews 2% inflation target, adds jobs to mandate
Canada Government Budget estimates released
Canadian inflation at 18-year high at 4.7% on supply chain woes
Canada adds 231,800 jobs in November; the most jobs in 8 months -ADP
NZD Pairs
Overlay of NZD Pairs: 1-Hour Forex Chart
New Zealand food prices fell 0.6% m/m and 4.0% y/y in Nov.
Treasury: New Zealand to return to budget surplus in 2023/24, two years ahead of schedule
New Zealand economy shrank 3.7% in Q3 vs. projected 4.1% contraction
New Zealand business sentiment slides in December. 23.2% of respondents expect the economy to slow
AUD Pairs
Overlay of AUD Pairs: 1-Hour Forex Chart
Australian NAB business confidence index down from 20 to 12
Australian Chamber–Westpac Survey of Industrial Trends: 50.8 in Q4 vs. 51.2 in Q3
ANZ-Roy Morgan Australian Weekly Consumer Confidence: 108.0 vs. 107.5 previous
Australia’s consumer sentiment slips by 1% to 104.3, still above 100.0 optimism level in November
RBA head Lowe: No rush to hike interest rates for now
Australian economy added 366.1K jobs in Nov vs. 203K forecast
JPY Pairs
Overlay of Inverted JPY Pairs: 1-Hour Forex Chart
Japanese industrial production figure upgraded from 1.1% to 1.8%
BOJ’s Kuroda says inflation may approach 2% target
BOJ offers 3rd consecutive daily cash injection to combat rising short-term rates
Japanese flash manufacturing PMI down from 54.5 in November to 54.2 in December
BOJ to return corporate bond and commercial paper purchases to pre-pandemic pace starting Apr 2022, extends loan scheme for small companies by six months to Sept