Think ING

USD: All focus on the new strain

Yesterday’s closure of the US markets for Thanksgiving caused most FX pairs to trade within very tight ranges. Today, markets will reopen but only for half a day, and should see another fairly low-volatility session today.

The general environment in FX remains remained quite supportive for the dollar, as the FOMC minutes and a bunch of good data kept market speculation on faster tapering and earlier tightening alive. On top of this, the worsening contagion situation in Europe and risk of fresh containment measures are generating further divergence in policy expectations between the ECB and Fed.

Overnight, we saw the highly oversold yen gain nearly 1% against the dollar while pro-cyclical currencies followed global stocks lower after the concerning news about a new Covid variant that appears to have the biggest mutation seen so far. The most notable previous Covid variants proved, in general, to be also more transmissible and more lethal than the first Covid strain, and scientists are attempting to evaluate whether this is the case as well. At a very early stage, the evidence seems quite concerning.

The variant has been identified primarily in South Africa, and multiple countries are rapidly blocking all flights to the country, as well as other African nations. The rand is unsurprisingly a major underperformer, having dropped to one-year lows and still looking quite vulnerable.

More information on the variant will be needed, but it looks like it is indeed going to be a very “black” Friday for global risk sentiment. JPY and CHF should remain a favourite choice as safe-haven hedges above the dollar, which should however remain supported against all the pro-cyclical bloc. NOK, AUD and NZD appear particularly at risk.

JP Morgan


Blindsided by price action overnight, the new variant news which was around yesterday has spooked markets, the durability of which at this stage is unknown. What it has done is caught a market during an illiquid period and whilst you can argue how serious this may or may not be, the fact that countries have learnt from the delta variant and are therefore quicker to impose travel restrictions etc will impact sentiment in the near term at the very least.

In a year which has been difficult enough to trade it’s understandable the market is de-risking overall despite what is pretty strong conviction from the data pick up in recent weeks as we head into the December Fed. What’s interesting in the price action is that euro is not that bid, which suggests to me the shorts out there are not huge, and I think a position that the market will try and add to into the noise, 1.1260/80 initially. I had reduced after the minutes so would look to do the same. Where has been painful is the jpy, I have reduced on the way down this morning and am watching key trend line support at 114.05 where I will exit cash and keep optionality into next week’s US data.

Elsewhere, am getting closer to home everywhere, price action is pretty scary and as we have seen before with variant risk it’s hard to have an edge. Eurnok up through the 100 & 200 day moving averages, eurczk already hurt by some curiously dovish Rusnok comments last night which at least had me reducing at somewhat better levels along with more local restrictions.