Markets appeared calmer about the implications of the new Omicron variant. The S&P500 rose 1.6%, and the US dollar and bond yields consolidated above recent lows. The US dollar index is up 0.3% on the day. EUR consolidated its pullback, between 1.1258 and 1.1295. USD/JPY rose from 112.90 to 113.96. AUD settled near a three-month low, ranging between 0.7114 and 0.7160. NZD weakened further, falling from 0.6840 to 0.6788 – a 12-month low. AUD/NZD rose from 1.0450 to 1.0497.
US 2yr treasury yields ranged between 0.51% and 0.55%, while the 10yr yield ranged between 1.51% and 1.56%. Markets fully price the first Fed funds rate hike to be in August 2022. Australian 3yr government bond yields (futures) ranged between 1.08% and 1.14%, while the 10yr yield ranged between 1.74% and 1.79%. Markets fully price the first RBA rate hike to be in July 2022.
Commodities, Brent crude oil futures rose 3.2% to $75, copper up 1.4%, gold fell 1.0%, and iron ore rose 7.9% to $102.
Overnight Currency Range
AUD/USD 0.7114 0.7159
EUR/USD 1.1258 1.1335
GBP/USD 1.3288 1.3361
USD/JPY 112.99 113.96
NZD/USD 0.6788 0.6838
USD/CAD 1.2722 1.2795
USD/CNH 6.3810 6.3950
AUD/JPY 80.55 81.40
AUD/NZD 1.043 1.0491
AUD/USD is trading at 0.7130 and between a range of 0.7159 and 0.7113 as the price corrects from daily lows. However, the recent news cycle around the focus on the Omicron variant suggests that mobility divergence and reopening strategies will shift back on the radar screen for AUD traders this week as cases are detected locally. This leaves a downside bias on the higher-yielding commodity currencies. Australia has already paused plans to reopen its borders to some foreign nationals amid fears over the new Covid variant. The nation was due to allow vaccinated skilled migrants and international students entry from 1 December. But Prime Minister Scott Morrison said a delay of a fortnight was "necessary" following Omicron's discovery. However, Australia, which has so far found five Omicron infections among travellers arriving in the country, has not announced rolling back any of the restrictions it had already eased earlier this month.
The omicron variant has done little to impact Fed tightening expectations so far, but it is bound to affect consumer confidence which has been known to impact the US dollar at times of despair. Nevertheless, sentiment has been helped by the WHO; while urging caution, the organization noted that symptoms linked to the new strain so far have been mild. Additionally, Moderna added to the positive sentiment by predicting it would have a modified vaccine ready by early 2022. As a consequence, global equity markets are higher, as are global bond yields. The US ten-year yield is up 3.31% and that is helping the greenback to recover.
Central bank speak is key
This makes Fed speak high up on the watchlist for the week ahead where we will hear from Fed’s John Williams, chairman Jerome Powell, and Michelle Bowman. Last Friday, Raphael Bostic played down the risk of the omicron variant. He said that is hopeful that the momentum of the US economy will carry it through the next wave of the coronavirus pandemic and that he remains open to accelerating the pace of the central bank's bond taper.
If the new Omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the Delta variant, Bostic said. "We have a lot of momentum in the economy right now," Bostic said during an interview with Fox News, citing strong jobs growth. "And that momentum, I'm hopeful, will be able to carry us through this next wave, however it turns out."
However, ''the added uncertainty is likely to keep the bar fairly high to a faster taper,'' analysts at Brown Brothers Harriman argued. ''Odds of Q2 liftoff have risen back to nearly two thirds, which we think is way too aggressive. That said, we believe that the monetary policy outlook continues to favour the dollar over the euro, yen, and Swiss franc. None of those central banks are likely to hike rates until 2023 at the earliest and so the 2-year yield differentials should continue to move back in the dollar’s favour this week after plunging last week.'
AUD/USD traded to a low of 0.7114 overnight with demand expected ahead of 0.7100 and again at 0.7050/70. Supply remains plentiful above 0.7200.
Event Risk Data Today
Aust: The current account balance is expected to post its tenth consecutive surplus in Q3, lifting further due to elevated commodity prices and higher volumes (f/c: $31.0bn). Q3 net exports should positively contribute to GDP as exports continue to outperform delta-affected imports (f/c: 1.2ppts). The successful health response to delta is anticipated to lift public demand further in Q3 (f/c: 1.2%). The unwinding of HomeBuilder and partial reversal of Sydney’s high-rise approval spike should see October’s dwelling approvals decline further (f/c: -4.0%). Meanwhile, private sector credit growth is expected to rise in October as businesses utilise credit to navigate the final stages of the delta lockdowns (Westpac f/c: 0.5%). RBA Deputy Governor Guy Debelle will appear on a panel at the 2021 Symposium on Indigenous Economies at 9:05am, followed by a “fireside chat” at the ACI conference at 1:00pm.
NZ: Measures of activity are expected to hold firm in November’s ANZ business confidence survey; inflation gauges should be monitored as prices and costs continue to rise.
China: November’s manufacturing and non-manufacturing PMIs should continue to highlight the underlying strength of China’s economy despite ongoing delta outbreaks and the risk of power outages (market f/c: 49.7 and 51.4 respectively).
Eur: November’s CPI result is expected to show a further lift, with recent inflation pressures likely to persist well into 2022 (market f/c: 4.5%yr).
US: September’s FHFA house prices and S&P/CS home price index are expected to report robust monthly gains given the strength of underlying demand (market f/c: 1.2% and 1.25% respectively).Ongoing delta concerns are however expected to hold back consumer confidence in November (market f/c: 110.7). Manufacturing’s strength is evident in the Chicago PMI, but supply disruptions and delta remain ongoing issues (market f/c: 67.0). FOMC Chair Powell and Treasury Secretary Yellen will appear before a Senate Panel on CARES Act relief. New York Fed President Williams will also give opening remarks at the New York Fed food insecurity event. The FOMC’s Clarida and Mester will then discuss Fed independence, foundations, and responsibilities.