EUR / USD
Euro-zone M3 money supply increased 7.7% in the year to October from 7.5% previously with private loans increasing 4.1% over the year. Economic data had little impact in Europe or US trading with risk conditions dominating market action amid the focus on the Omicron variant.
The Euro posted another round of gains ahead of Friday’s New York open with a further closing of short positions as fresh coronavirus fears undermined confidence in carry trades. Overall risk conditions continued to dominate later in the day, especially with trading volumes curbed in US markets. There were further concerns that the new variant would cause major damage to the global economy. The lack of liquidity also had an important in increasing volatility with one-sided trading.
Euro short covering continued and the dollar failed to gain significant defensive support amid concerns over the US vaccine levels and the Euro pushed to highs above the 1.1300 level against the US currency while commodity currencies declined sharply.
Sentiment stabilised on Monday with hopes that governments would be able to avoid major restrictions, but uncertainty inevitably remained high. The Euro retreated to around 1.1265 with markets assessing any comments from Federal Reserve officials and Chair Powell is due to testify to Congress on Tuesday.
Risk appetite continued to deteriorate rapidly during Friday with sharp losses across equities and commodities as markets fretted over the risks posed by a new coronavirus variant. There was a sharp retreat in US equity futures and US yields also continued to decline with the 10-year sliding to lows around 1.50%.
Markets were concerned that the new Omicron variant would force the Federal Reserve to change tack and curb monetary tightening. In particular, there were notable doubts whether the Fed would decide to reduce bond purchases at a faster pace.
There was notable defensive support for the yen, especially given the very substantial short yen position in global markets which triggered a sharp round of position adjustment. In this environment, the dollar declined sharply against the yen to lows near 113.00 before stabilising. US yields continued to decline later in the session with the 2-year yield registering the sharpest decline since March 2020 while the S&P 500 index posted a decline of 2.3%.
The dollar rebounded in early Asia on Monday with a strong advance to near 113.90, but was unable to sustain the advance despite a significant recover in US futures and a measured tone in Asian bourses. Yields remained lower and the dollar retreated to near 113.20 before a recovery to 113.50 with the Euro around 127.75.
Sterling remained under pressure in early Europe on Friday amid the general slide in risk appetite as markets fretted over risks posed by the new coronavirus variant. The currency posted fresh 2021 lows against the dollar but did manage to find support below the 1.3300 level.
Bank of England chief economist Pill stated that the labour market remains strong and there is no evidence of a significant increase in unemployment. He added that the ground had been prepared for policy action and that interest rates will need to rise gradually over the coming months. He also noted that rates can continue to increase if data strengthens and inflation is forecast to remain persistently above target. The comments suggested that he would back a small rate increase in the near term.
The rhetoric could have provided net Sterling support, but risk conditions continued to dominate during the day, especially with a high degree of uncertainty over omicron. Sterling did find further support close to 1.3300 against the dollar, while the Euro advanced to highs near 0.8500. The UK government announced some renewed restrictions, although with a clear attempt to avoid economic disruption. There were calmer conditions on Monday with markets waiting for Omicron developments and any hints from the Bank of England on the December meeting. Sterling settled around 1.3325 against the dollar with the Euro around 0.8460.
The Swiss franc strengthened further on Friday as the currency drew further support from safe-haven considerations. As risk appetite continue to slide, there were further franc gains with the Euro dipping to fresh 6-year lows near 1.0435. The dollar was unable to make headway and retreated to 0.9220 before recovering slightly.
Swiss National Bank member Maechler stated that the central bank is following franc developments very closely and stands ready to intervene. She also emphasised the need to maintain inflation within the 0.2% range over the medium term. The Swiss referendum failed to back a lifting of covid restrictions while the franc maintained a strong tone despite a tentative recovery in risk appetite with the dollar near 0.9265. The latest data on sight deposits will be watched closely on Monday.