Asian markets are in the green this morning, following the swing higher in both European and US shares yesterday which rose sharply between 1.5% and 3%. Despite some less positive news around another Chinese property developer, risk sentiment remains fairly optimistic. The dollar is stuck on the side lines at present, as more risk-sensitive commodity currencies claw back losses and safe havens get offered. Next week’s FOMC meeting is a clear risk event for the greenback, with downside against the euro and yen expected to be limited.
Glass half full approach
Investors are holding on to anecdotal evidence above Omicron’s limited impact on public health and therefore the wider economy.
High cash levels are being put to work and investors are chasing riskier assets.
But real concerns still remain about the new variant as new lab data showed that the protection from the Pfizer vaccine is likely reduced 20-40-fold. There are many question marks about if Omicron is better able to evade vaccine and infection-induced immunity, though markets appear to be focusing on the micro, individual risk rather than the wider, macro threat to society. If more people get infected, there is a higher risk that more people on an absolute level may still get admitted to hospital. It’s probably best to leave this to the scientists and medical professions!
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Bank of Canada meeting in focus
With fears easing over the new variant, traders are keeping one eye on calendar risk events. The Bank of Canada meeting later today should see rates kept unchanged at 0.25%. But the focus will be on the bank’s assessment of the current risks around the Omicron variant. Policymakers are appearing to have different takes on the impact on economies. The upbeat messages from the Fed and yesterday’s RBA meeting contrasts with recent BoE comments which were more cautious.
Having announced the end of QE at its last meeting, the booming labour market and GDP, sky-high inflation and a thriving housing market in Canada would normally see a hawkish response from BoC policymakers.
The market is pricing in around five rate hikes next year, with some economist seeing the first move in January. A more cautious stance by Governor Macklem, with economic forecasts not due until the new year, would upset this outlook and see selling in CAD.
Loonie enjoying risk and oil rally
Commodity currencies have recovered some of their recent losses this week on the rebound in risk and oil prices. USD/CAD had been in a bull channel after six solid weeks of gains. But the last few sessions have seen a sharp reversal with summertime resistance above 1.28 again doing a job. The 50% retracement of the October/December dollar rise will offer support at 1.2570. The 100-day SMA sits just above here. Resistance is in the high 1.27s and the barrier around 1.28.
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