The news that Pfizer expects three vaccine doses to provide good enough coverage against the Omicron variant was not received uniformly by the markets yesterday. Treasuries weakened and 10-year yields broke above 1.50%, but equities struggled to stay in the green and commodities staged only a contained rally. In FX, the dollar emerged as an underperformer, seemingly re-establishing a negative correlation with risk appetite.
There are only jobless claims data on the US calendar today, and the dollar should remain driven by global factors. Most are inclined to think that investors may be attracted by current levels to build back some dollar positions ahead of the CPI report tomorrow and the Fed meeting next week.
The loonie extended its recent gains yesterday, as Pfizer headlined those 3 doses ‘neutralizes’ Omicron saw risk rally across the board. This saw the USD/CAD go into the BoC meeting just above 1.2610. The statement was dovish with expectations for a first-rate hike pushed out to sometime in the ‘middle quarters of 2022’. This was a slight disappointment to those that were hoping for a hint that Jan 2022 would be a ‘live’ meeting. However, the BoC did drop the word temporary relating to inflation, stating that employment is back to pre-pandemic levels and noting that recent economic indicators suggest the economy had considerable momentum into the fourth quarter. So while the BoC announcement may cause some short-term disappointment, expect the CAD to rally over the medium term against most of its currency peers.
The EUR/USD rally stalled around the 1.1350 level yesterday, now trading in the middle of the 1.1300/1.1350 range. Analysts are inclined to expect a pullback towards the 1.12/1.13 range in the next few days ahead of the Fed meeting next week. Possible Covid restrictions are likely to dictate direction over the coming days. There are no major events on the calendar today, leaving the currency to trade on broad market themes.
Sterling is currently an underperformer dragged down by the introduction of new Covid restrictions by the British government yesterday. This is contributing to market sentiment towards the “no-hike” camp ahead of the 16 December Bank of England meeting.
PM Boris Johnson seems to be navigating the toughest period of his tenure and there is some risk that along with the economic implications of new restrictions in the UK, markets may be inclined to price in some degree of political instability as well. Some recovery in the dollar may pressure GBP below 1.3200 today.