The US Job report was mixed at the end of the last week thus forcing a whipsaw on the price of the global reserve currency. In the end, the risk-off sentiment persisted. However, there are minor countermoves across the major asset classes at the start of the new week. Later in the week, traders will have RBA & BoC rate statements and US CPI data to figure out. Omicron headlines remain a major risk driver and all eyes will be on any latest developments.
Last Week Recap
The market started the last week on the back of a solid risk-off sentiment after the advent of the Omicron variant in the previous week. However, the fear subsided as the market adjusted to the realities while preparing for the next action. Alongside the virus variant, the market also reacted to key macroeconomic events including the testimonies from Fed Chair Powell and his BoC mate while the OPEC+ meeting was most talked about in the energies market on Wednesday and Thursday. The US and Canada job report closed the week.
Mixed US Job Reports
The dollar spiked to 96.5 (DXY) after Powell’s bullish testimonies but quickly fell and struggled to build on the hawkish notes. However, it has been able to maintain the gradual rally on Monday despite the mixed US job reports on Friday causing some confusion in the market. While the NFP came far worse than expected, the unemployment rate came much better than expected. The dollar responded with an inverted ‘V’ shape move – failed attempt to break below 96 as the bulls continue to hold.
After the OPEC+ meeting last week, Oil bears took a break as the commodity (WTI) jumped from $62.5 to $69. Despite the US ‘threat’ to release 50 million barrels and Omicron’s negative impact on demand, the cartel of Oil producers remained resolute to proceed with the 400,000 BPD supply hike they intended to commence in January. However, the group was ready to follow up with the realities amid Covid and will quickly converge to make necessary decisions as the conditions demand. The OPEC+ decision, while it looked bearish in the short-term, is perceived to be of a long-term advantage to the market as it spells confidence that demand surge will start again in the first quarter of 2022.
The Canadian dollar had a similar experience with the dollar last week with its own inverted ‘v-shape’ move across the board. Job reports were much better than expected. However, the impact didn’t last as Covid-influenced risk sentiment and OPEC+ meeting came calling.
Overall, last week, the equities market fell further. However, the US markets had a slight recovery late on Friday. High beta FX all fell while the safe-havens FX continue to stay bullish. Gold pushed up significantly in the last days after some late pressure on the US treasury yield. Overall, risk-off sentiment persisted.
The Week Ahead
Another interesting week is expected. Already, there are minor retracements across different assets early on Monday, ahead of the London session. The dollar index is up over 02% already, Gold over 0.1%, WTI 0ver 2.5%, and the S&P 500 by over 0.5%.
In the FX market, Aussie, GBP, USD and CAD are the leaders as we head to the end of the Asian session ahead of the Londo opening. However, CHF has been the biggest laggard of the session followed by the Euro, JPY and NZD. Stronger volatility is expected during the London session. What are the major risk drivers this week?
The new variant has been detected in more countries thus leading to inter-country travel restrictions. This doesn’t bode well for risk. Therefore, investors will remain cautious. However, unless worse news emerge in the big economies, investors will attempt to test the waters again this week considering the confidence shown by the policymakers last week (OPEC and Fed). Therefore, a sentiment shift is very likely at some point this week. More risky assets are expected to stage some recovery which is expected to put pressure on safe havens. However, events unfolding should be watched with keen interest.
MPC member Broadbent will speak on Monday about the growth, inflation and monetary policy outlook of the UK. Perhaps, this could lift the GBP which has been bearish for over two weeks. This is going to be the major event on Monday.
On Tuesday, the RBA is expected to maintain its cash rate at 0.1%. However, some dovish tone might follow as a result of the new Covid variant and some below-par economic data recently coming from China. The statement from the bank will give investors another opportunity to see how policymakers perceive the new variant and its impact on economic recovery.
On Wednesday, attention will be shifted to the BoC monetary policy statement. The bank is also expected to maintain its interest rate at 0.25%. The fresh risk imposed by the new variant will most likely discourage the bank from cutting the rate as it would have if otherwise. US crude oil inventories will also be watched by Oil traders.
On Thursday, US unemployment claims, the 30-yr bond auction will be watched especially by Gold traders. Also, the RBA Governor Lowe will speak after the closure of the New York session.
On Friday, the inflation report from the US will steal the spotlight. Monthly CPI is expected to drop compared to the previous.