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New Covid Strain Causes Havoc on FX Markets

USD - US Dollar

The rebound in equities yesterday was relatively contained and are back in the red this morning. Markets are waiting for confirmation that the current vaccines offer enough protection against the Omicron variant. For now, the US administration running on the assumption that new vaccine formulas will not be needed and is simply planning to roll out booster doses faster to manage the new variant.

Tonight’s Senate Testimony by Fed Chair Powell will focus on the significant downside risks stemming from the Omicron variant to both employment and economic activity. Markets have now pushed back the first-rate hike by the Fed, to September 2022. A recovery in risk sentiment remains tied to positive news on the vaccine coverage against the omicron variant.

CAD - Canadian Dollar

The loonie was a major victim of last Friday’s risk sell-off and its exposure to oil prices. A hit to sentiment, oil prices and the potential pricing out of BoC rate expectations due to the Omicron variant spread, still signal sizeable downside risks for CAD.

Today, we’ll see Canada’s growth numbers for 3Q, and the consensus for the annualized figure is around 3.0% YoY. Barring a major miss, the Bank of Canada’s tightening plans should not be impacted as the economy is running quite hot in Canada and a tight jobs market is fuelling concerns of persistent inflation.

EUR - Euro

November estimates published yesterday showed that inflation broke the 6% mark in Germany, and our economist expects more upward pressure on prices before a gradual retreat in 2022. We’ll see the French and EZ-wide inflation numbers today, but the impact on the EUR should be secondary to the swings in sentiment related to the Omicron variant. A return to 1.1200 in EUR/USD appears to be linked to an improvement in sentiment about the implications of the new strain.

GBP - British Pound

The UK will start offering booster doses to all adults, a move that follows fresh restrictions on international travel imposed by the Government to contain the spread of the Omicron variant. With the 16 December BoE rate decision drawing closer, a worsening of the virus situation globally and specifically in the UK, may not only put upward pressure on the GBP due to the pound’s higher sensitivity to risk sentiment but may also mean markets could increasingly price out a December rate hike by the BoE. The UK data calendar is quite empty leaving the currency to trade on broad market themes.

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