SW Weekly Market Update 5

Weekly market update 26 December – Dollar retreated from December’s highs heading into the holidays, risk-on mood could set the tone stepping into 2022

Weekly market update 26 December -Dollar retreated from December’s highs heading into the holidays, risk-on mood could set the tone stepping into 2022

1. The Dollar was set for its worst week since August. Weakness of the dollar against equities, bond yields and risk sensitive currencies is attributed to investors’ confidence growing on signs that the omicron variant is less severe than feared, seasonal tendencies and optimism from President Biden as he said that the US will not go back to lockdown. S&P 500 rose for the third straight session on Thursday to finish at 4726, a new closing record high. On the data front, annual PCE inflation rose to 5.7%, the highest in 39 years. Jobless claims remained below pre-pandemic levels last week. Dollar fell against the British pound and Euro, while it gained against the safe haven yen. Volume in the markets remain rather low during the festive season with the markets closed on Christmas.

2. The euro traded at around $1.13 nearing the end of the year, hovering near a recent 17-month low of $1.12, amid concerns over Europe’s slowing pace of economic growth given the increasing inflationary pressures and renewed COVID-19 restrictions due to the outbreak of the Omicron variant. Recently, Netherlands returned to a state of lockdown due to the rapid spread of the Omicron variant. Nevertheless, the ECB’s recent pivot in its plans to reduce the pace of asset purchases while maintaining the ultra-loose monetary policy could keep the euro relatively weaker going into 2022. Sterling, on the other hand, managed to break above $1.34 against the greenback, amid more upbeat economic data to support the U.K.’s economic recovery. The U.K. economy is now only 1.5% below pre-pandemic levels taken from the last quarter in 2019, as opposed to a previous estimate of 2.1% below. The U.K. government also decided not to tighten restrictions ahead of the Christmas holidays amid news that the Omicron variant may be less severe, although more transmissible. Moving forward, the pound could continue to strengthen as the risk sentiment skews more towards a risk-on mood in the short term as the new year approaches. Investors are expecting a relatively quiet market at the end of 2021 as banks will be on holiday at the start of the week.

3. The Aussie appreciated to a 1-month high above $0.72 against the U.S. Dollar, amid a more positive economic outlook and increased risk appetite among investors. The Reserve Bank of Australia kept its cash rate unchanged at a record low of 0.1% during its last meeting of 2021. Policymakers also noted that inflation is relatively lower than in many other countries amidst modest wages growth and reiterated that they are not likely to raise rates until inflation is sustainably within the 2% to 3% range. The Kiwi also performed similarly, holding above $0.68 on Friday. A milder than expected contraction in New Zealand’s economy also reassured investors’ expectations of further central bank’s monetary policy tightening. The Canadian dollar traded around $1.28, amid increasing economic optimism and an improvement in risk appetite, which corresponded to a recent rebound in oil prices. Gold held at $1,808 per ounce on Friday given its appeal as an inflationary hedge, although higher interest rates and improved economic outlook could worsen the outlook for the traditionally risk-off asset.