Financial Markets Turn Risk-On as Omicron Concerns Ease

The US dollar and other safe havens pulled back yesterday, while the risk-linked currencies and equities rebounded decently, following headlines that the Omicron coronavirus variant may eventually not be as severe as initially estimated. Overnight, we also had an RBA decision, with the Bank maintaining its policy unchanged and reiterating that interest rates are likely to start rising in 2023.

EQUITIES REBOUND, SAFE HAVENS PULL BACK ON REASSURING COVID HEADLINES

The US dollar traded lower against most of the other major currencies on Monday and during the Asian session Tuesday. It gained only versus JPY and CHF, while it was found virtually unchanged against EUR. The greenback underperformed versus AUD, CAD, GBP, and NZD in that order.

The weakening of the US dollar and the other safe-havens, yen, and franc, combined with the strengthening of risk-linked currencies Aussie, Kiwi, Loonie, and lately the pound, suggests that markets turned to risk-on trading yesterday and today in Asia. Indeed, major EU and US indices were a sea of green, with the positive appetite rolling into the Asian session today.

The driver behind the improvement in the broader market sentiment was once again headlines surrounding the coronavirus and the new Omicron variant. On Saturday, a South African health official said that, despite higher hospital admissions among children due to the new variant, infections have been mild. US infectious disease official Anthony Fauci added more credence to that view, telling CNN that “it does not look like there’s a great degree of severity.”

It seems that coronavirus remains on the front page of investors’ agendas. More headlines suggesting that the Omicron variant is not as severe as initially thought could encourage market participants to add more risk to their portfolios. However, we stick to our guns that we will not call for a long-lasting recovery yet. Yes, the fact that more officials reassure the world on the Omicron variant makes us more positive than we were last week. However, until we get formal and justified answers from the World Health Organization, we prefer to maintain some cautiousness. Anything that comes in contrast with the latest reassuring headlines could result in further stress and anxiety, and thereby another round of risk aversion.

This means equities could turn south again, with investors seeking shelter to safe havens, like the yen, the franc, and the US dollar. At the same time, risk-linked currencies, like the Aussie, the Kiwi and the Loonie, could come under selling interest. Despite the Aussie being the best performer yesterday, we believe that it could switch to the main loser in case the outlook deteriorates. The reason is the monetary policy divergence of the RBA with the central banks of the other risk-linked currencies. The RBNZ has already begun lifting rates, while the BoC is expected to do so in coming months. On the contrary, overnight, the RBA maintained its policy unchanged and reiterated the view that they are unlikely to touch the hike button next year. They hinted again that his could happen in 2023. Taking that into account, we would expect AUD/JPY to be among the currency pairs that will suffer the most in case market sentiment deteriorates again.

AUD/JPY — TECHNICAL OUTLOOK

AUD/JPY traded higher yesterday and today in Asia, after it hit support at 78.80 on Friday. At the time of writing, the rate is trading slightly above the high of December 2nd, at 80.58, but it still stays below the downside resistance line taken from the high of November 4th. Thus, even if the rate continues north for a while more, we see decent chances for the bears to jump back into the action again.

The recovery may continue until the rate tests the 81.45 barrier, which provided resistance on November 29th and December 1st. The bears may take charge again from near that zone and push the action back down, towards Friday’s low of 78.80. A break lower will confirm a forthcoming lower low and may see scope for declines towards the 77.90 territory, defined as a support by the low of August 20th.

We will start considering the bullish case if we see a break above the 82.15, marked by the inside swing low of November 19th. This could confirm the break above the aforementioned downside line and may initially target the 83.20 zone, which provided resistance between November 22nd and 25th. If the bulls are not willing to stop there, then we may see them pushing towards the 84.15 ore 84.50 zones, where another break could extend the advance towards the peak of November 4th, at 85.20.

FTSE 100 — TECHNICAL OUTLOOK

The FTSE 100 cash index traded higher on Monday, hitting the downside resistance line taken from the high of November 12th. That said, today, the cash index emerged above that line, as well as above yesterday’s peak, something which suggests that more advances may be on the cards for now.

If the bulls are willing to stay in the driver’s seat, we could see them pushing towards the 7310 zone, which acted as a resistance on November 25th. If they are not willing to stop there either, then we could see them pushing towards the peak of November 16th, at 7370, or the high of November 12th, at 7397.

The outlook could darken again if we see a drop back below the 7180 zone, which is near the high of December 1st, and has also provided resistance back on October 18th and 21st. The index will be back below the aforementioned downside line, but also below the upside one taken from the low of November 30th. The bears could then get encouraged to drive the battle towards the low of December 3rd, at around 7090, the break of which could extend the fall towards the low of December 1st, at 7025.

AS FOR TODAY’S EVENTS

The only releases on the calendar worth mentioning are Eurozone’s second estimate of GDP for Q3, which is expected to confirm its initial estimate of +2.2% qoq, as well as the US and Canadian trade data. The US deficit is expected to have narrowed decently, while Canada’s surplus is forecast to have increased. Canada’s Ivey PMI for November is also coming out, but no forecast is available.

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