Key Headlines

  • In a joint congressional hearing with Yellen, Fed Powell will say that the rising Covid-19 cases and omicron variant threaten to imperil the economic recovery and exacerbate inflation pressures.
  • China’s official PMIs unexpectedly rebounded to expansion in November, ending a two-month contraction. But sub-indexes measuring domestic and external demand remained in contractionary territory this month.
  • It is month-end and rebalancing of portfolios tops agenda. Hearsay shift out of equities into bonds.

FX Flows

  • There wasn’t much of Tokyo fixing activity, speculators bought €Yen ahead of open but ran into difficulty near 128.50. Apparently, EUR$ offers were iceberg around 1.1300. $Yen got up to 113.90 and then reversed back. Slightly firmer UST yields should tempt buyers on dips. There is one decent option strike maturing today New York cut, at 113.80 we have $1.6bn, others are way off the radar.
  • With €Yen buying earlier, EUR$ rose to 1.13005, offers were hidden or iceberg. With talk of month-end rebalancing, think we might just squeeze through. First level of resistance is 1.1330, then 1.1370. Downside support at 1.1260, there is a €1.03bn 1.1255 strike due today. I suspect that market positioning is well balanced, leveraged accounts are small short while IMM are long, they have reduced over the past weeks but still substantial. Late morning squeeze soaked up offers and rose to 1.1305.

Credit Agricole

USDJPY & Omicron

The emergence of the omicron coronavirus variant led to a clearing out of long USD/JPY positions. According to our FAST FX model, USD/JPY has become undervalued relative to its short-term fundamentals. Omicron has so far shown to cause minor symptoms. While there was a rapid spread of the variant throughout South Africa, less than a quarter of the country’s population is fully vaccinated. Pharmaceutical companies have the ability to refit their vaccines and provide new vaccines to counter the omicron variant, if needed, by the New Year. n We continue to expect 2022 to represent the return to something more ‘normal’ in the global economy as more countries adopt living with Covid strategies.

This environment would be negative for the JPY, especially as Japan stands to gain the least out of the G10 economies given that its services sector makes up the smallest part of its economy relative to its manufacturing sector. n USD/JPY represents a good hedge against inflation being more than transitory in 2022 given its positive correlation with oil prices, and we believe the Fed will be one of the first major central banks to respond if inflation pressures turn out to be less transitory than expected.