CAPITALDIGEST, MARKET REVIEW. 10 JANUARY 2021.
MONDAY 3/1/2022 – DOLLAR STARTS OFF 2022 ON HIGHER NOTE AS YIELDS CLIMB
The U.S. dollar rose against a basket of major currencies on Monday, the first trading day of the new year, in sync with government bond yields as investors anticipate the Federal Reserve will stay on its path of interest rate hikes in 2022. While the surge in coronavirus cases caused by the Omicron variant continued to impact global travel and public services, investors remained optimistic that lockdowns would be averted. On Monday, the U.S. Food and Drug Administration authorized the use of a third dose of the Pfizer and BioNTech COVID-19 vaccine for children aged between 12 and 15 years, and narrowed the time for all booster shots to five months from six months after primary doses. Yields on U.S. two-year notes, which are sensitive to rate hike expectations, along with 5-year notes, soared to their highest level since March 2020. Benchmark U.S. 10-year and 5-year yields rose to six-week peaks. The U.S. central bank is seen as likely to begin hiking interest rates by mid-2022. “Markets in general have a short attention span when it comes to anything COVID related and it has been this way since the very beginning,” said Erik Bregar, president and CEO at Bregar Capital Corp in Toronto. “I don’t feel a risk-off vibe today because oil is steady, stocks are still green… right now yields are the driver.”
TUESDAY 4/1/2022 – DOLLAR SURGES AGAINST YEN AS INVESTORS BET ON FED HIKE
THE US dollar extended gains against Japan’s yen on Tuesday (Jan 4), hitting new 5-year highs as investors bet that the fast-spreading Omicron coronavirus variant would have limited economic impact and that the Federal Reserve would hike rates. In the second trading day of 2022, global markets extended the upbeat moves seen on Monday. The dollar’s gains were helped by a rise in US Treasury yields, with the US 10-year yield hitting a 6-week high. At 1158 GMT, the dollar index was up 0.2 per cent at 96.398, its highest in 13 days. Versus the yen, the dollar was up 0.7 per cent at 116.125, extending its overnight gains to reach its highest since January 2017. But it was only the biggest daily gain for the dollar versus the yen since November 2021. The euro was down 0.2 per cent versus the dollar, at US$1.1276. Investors see Omicron as potentially less disruptive to the global economy than previous variants, following studies suggesting that the risk of hospitalisation is lower. Money markets have fully priced in a first US rate increase by May, and 2 more by the end of 2022. Asia’s factory activity grew in December as companies withstood rising global cases of the Omicron variant, though persistent supply constraints and rising input costs clouded the outlook for some economies. Risk-sensitive currencies were generally up on the day.
WEDNESDAY 5/1/2022 – STERLING RISES TO 2-MONTH HIGHS ON RATE VIEW
The pound climbed to a two-month high on Wednesday as investors ramped up expectations that the Bank of England will raise interest rates as early as next month after a surprise hike in December. And growing expectations that Britain will not introduce COVID-19 measures clamping down on economic activity was also boosting the stock market, with the benchmark index (.FTSE) rising to its highest in nearly two years. “Last night’s release of several research papers on Omicron’s milder severity and now this morning talk of Boris Johnson not looking to tighten restrictions after (Christmas) is keeping the pound bid,” Nomura strategist Jordan Rochester said. Prime Minister Boris Johnson on Tuesday said that England could withstand a surge in COVID-19 infections without shutting down the economy as Britain reported another record daily high in cases fuelled by the Omicron variant. read more Against the dollar, the pound edged up for a second consecutive day to $1.3564, its highest since early November. The pound has also benefited from stronger stock markets. Kenneth Broux, a strategist at Societe Generale said the correlation between the pound/euro exchange rate and U.S. stocks has strengthened to its highest levels in nearly three months.
THURSDAY 6/1/2022 – POUND DIPS ON DOLLAR STRENGTH; UK SERVICE PMIS HIT 10-MONTH LOW
The pound slipped versus the dollar and euro on Thursday, hurt by dollar gains after the Fed meeting minutes, while investors weighed up the extent to which easing fears around the Omicron variant of COVID-19 would translate into economic gains. Risk-sensitive currencies such as the British pound, Australian dollar and Canadian dollar were down on the day versus the U.S. dollar, which was boosted late on Wednesday and overnight by the minutes of the Fed’s December meeting being more hawkish than expected. These sparked worries about faster than expected monetary policy tightening as they showed that a “very tight” job market and unabated inflation might require the Fed to raise rates sooner than expected. Services PMI data came in slightly higher than the preliminary “flash” reading, but still showed that Britain’s services sector suffered its biggest loss of momentum last month since the country was last in lockdown, with the index falling to a ten-month low as the spread of the Omicron variant of coronavirus hammered hospitality and travel. At 1634 GMT, the pound was down 0.2% against the stronger dollar at $1.3535 . Versus the euro it was down around 0.1% at 83.51 pence per euro .
FRIDAY 7/1/2022 – DOLLAR SUFFERS BIGGEST DROP IN SIX WEEKS AFTER U.S. JOBS REPORT
The dollar was on track for its biggest daily percentage drop in six weeks on Friday on the heels of the December U.S. jobs report that missed expectations, but it was still seen as strong enough to keep the Federal Reserve’s tightening path intact. The dollar index fell 0.546% at 95.734, and was poised for its biggest drop since Nov. 26, when concerns about the Omicron COVID-19 variant began to rattle markets. Even with Friday’s weakness, the dollar was still on track for a slight weekly gain, its first in three weeks. The Labor Department said nonfarm payrolls rose by 199,000 last month, well short of the 400,000 estimate. But analysts noted underlying data in the report appeared sturdier, with the unemployment rate falling to 3.9% against expectations of 4.1% while earnings rose by 0.6%, indicating tightness in the labor market. The report also increased expectations the Fed will begin to hike interest rates at its March meeting, with futures on the federal funds rate implying a 90% chance of a hike, up from 80% on Wednesday. “While the headline might have fallen short of the consensus, the consensus doesn’t matter much to the Fed. For them, this probably justifies their hawkish tilt,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.