US dollar stages a post-Friday recovery

Swiss franc, yen fall as risk sentiment improves

In a rather surprising move for the author, the US dollar suffered heavily on Friday, the dollar index falling by 0.74% to 96.07 as haven currencies like the Swiss franc and Japanese yen staged powerful rallies. EUR/USD rallied as well, perhaps because so much bad news was priced into it, climbing 0.90% to 1.1310. The US dollar suffered, I believe, on cross margining selling, and that an Omicron wave would bring the Fed’s taper to a shuddering halt, something with which I agree with, as US yields fell sharply at the long end of the curve.

This morning, the rally in US equity futures and oil has lessened those fears, with US yields also firming. That has seen the dollar index rally by 0.22% to 96.28, with the JPY, CHF and EUR falling by around 0.25%. USD/JPY fell by an impressive 1.70% to 113.40 on Friday, testing 113.00 intraday. From a technical perspective, USD/JPY should start to form a bottom around 113.50 and EUR/USD will likely struggle to make much progress above 1.1300 unless US bond yields dramatically fall from here.

Currency markets are also sending out a few subtle signs that risk sentiment remains highly elevated, with Asian currencies falling aggressively on Friday, but making back only very modest gains today. Notably, USD/KRW is unchanged at 1193.50 today, and USD/CNY is barely changed at 6.3860. USD/THB, meanwhile, has actually risen 0.70% to 33.740 and USD/MYR is unchanged at 4.2380. Another warning sign comes from USD/TRY which is also unchanged, although the Mexican peso and South African rand, cremated on Friday, have risen 1.0% on thin volumes. The Australian and New Zealand dollars fell 1.0% to test 2021 lows at 0.7100 and 0.6800 on Friday, but the sentiment indicators have only recovered by 0.25% this morning.

So, in the EM and commodity space, currency markets are adopting a much more cautious tone, suggesting the overall market remains very much on edge. Like equities, a negative Omicron headline or two is likely to see the sell-off resume in earnest, which should benefit the yen and franc once again. Markets will be very much set up for a binary outcome this week based on Omicron headlines, subsuming even the US Non-Farm Payrolls results. Positive news, buy everything, sell havens. Negative news, sell everything, buy havens, watch the whipsaw, and rinse repeat. Volatility will be the winner.

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