SW Weekly Market Update 2 1

Weekly market update 12 December – Dollar fluctuated ahead of FOMC meeting, RBA and BoC left rates unchanged

Weekly market update 12 December – Dollar fluctuated ahead of FOMC meeting, RBA and BoC left rates unchanged

1. The Dollar Index pared recent gains to trade at 96 on Friday, as investors await the FOMC meeting, with expectations for the Fed to accelerate the tightening of the monetary policy in response to rising inflationary pressures. US consumer price inflation released on Friday jumped to 6.8% in November, the highest since 1982 and well above the target of 2%. Still, consumer price data came up as expected as investors turn to the Fed meeting next week to assess clues on the tapering timeline as well as monetary policy. 10 Year Treasury yield edged higher to 1.50% on Friday, losing momentum as investors digested inflation data. US stocks rebounded as the 3 stock indexes are on track to book a nearly 3% gain on the week. Meanwhile, CPI matched analyst estimates, hitting a high of 6.8% since 1982. Michigan Consumer Sentiment increased to 70.4 in December, beating market forecasts of 67.1. The US budget deficit widened to USD 191 billion in November 2021, less than preliminary estimates of US 195 billion. Attention now turns to the Fed’s interest rates decision next week, with investors trying to assess clues on the future of the monetary policy.

2. The Euro hovered around $1.13 against the greenback, as investors try to assess the impact omicron will have on economic recovery, along with surging energy prices and new Covid-19 restrictions. With a monetary policy outlook divergence between the ECB and the Fed, Euro has been under pressure as investors turned to the dollar on the back of a hawkish Fed. On the data front, the ZEW Indicator of economic sentiment for the Eurozone rose by 0.9 points to 26.8 in December, the highest since September. Looking ahead, investors will be looking forward to ECB monetary policy next Thursday, with the expectations that the ECB will maintain its relatively dovish stance as compared to other central banks. The British pound weakened to $1.32 in December, touching its lowest level since November 2020 after Prime Minister Boris Johnson announced tougher restrictions against COVID-19 in England due to the spread of the omicron variant. As such, investors have scaled back on expectations of an interest rate hike by the Bank of England.

3. The Aussie rebounded towards a two-week high of 0.717 against the greenback, remaining vulnerable to the omicron variant-related headlines and expectations of further policy tightening by the Federal Reserve. While the RBA kept rates unchanged, investors pointed out a change in the central bank’s language where a reference to inflation in 2023 has been removed, suggesting a more hawkish tilt. A jump in the yuan also benefited the Aussie as investors use it as a liquid proxy for Chinese currency. Kiwi has been under pressure since the start of November, amid a series of hawkish signals from the Federal Reserve and mixed market sentiment. RBNZ also hiked rates by 25 basis points in its last meeting, short of speculations of a 50 basis points hike which analysts believed would be more supportive of the currency. Elsewhere, the Bank of Canada said that the omicron variant had raised uncertainty around economic recovery and maintained its guidance on the start of rate hikes during middle quarters in 2022. Higher oil prices, however, cushioned losses of the Loonie.