What a roller coaster of a week it has been for the dollar. On Wednesday, the FED announced accelerated taper and signaled 3 interest rate hikes in 2022 following by 3 and 2 hikes in 2023 and 2024 consecutively. It was possibly the most hawkish outcome that we could get from the FED but the market reacted with a sell-off of the dollar right after Powell's press conference. The dollar lost 0.5% against the basket of major currencies. But its weakness should not be misleading. The FED is now one of the fastest hikers among all central banks and this should provide support to the dollar over the long run. The green-buck ended the week on a strong foot by gaining back 0.5% due to a strong risk aversion seen in the markets on Friday. It now all comes to CPI and employment report in January.
The Euro was the most stable currency of the week. The ECB meeting on December 16 didn't substantially change the state of affairs. Christine Lagarde announced changes in QE programs which she called a "re-calibration" some time ago. The ECB currently runs 2 programs: Pandemic Emergency Purchase Program which will end by March 2022 and Asset Purchase Program which will be increased to €40bn in Q2 2022, and brought back to the current €20bn in Q4 2022. Basically, we could say that the outcome is rather hawkish because we end up with just one program which will be eventually reduced. However, all policy rates remain on hold.
GBP experienced a rather volatile week. The job report released on Tuesday showed that the employment conditions are improving. The unemployment rate fell till 4.2% which is still far from 3.6%, the level seen before the pandemic. The inflation report published on Wednesday showed that the consumer prices are increasing at the highest pace over a decade. CPI in November came at 5.1% on y/y basis. We are not sure if this is what pushed the Bank of England to surprise the markets once again and hike the interest rate by 0,15%. BOE didn't increase rates back in November when everybody expected a hike, but they increased rates now when nobody expected that. Of course, the initial market reaction was strong and the GBP index spiked over 0.6%. However, rapidly rising Omicron cases in the UK reduce chances of second rate hike in February. This puts the GBP upside scenario under risk. The pound was still up 0.36% over the last week.
As a low-yielding and safe-heaven currency, the yen saw much less action in the beginning of the week. However, the rising risk aversion boosted the yen index by almost 1% since Thursday afternoon. JPY finished the week by gaining 0.26% as the 3rd strongest currency.
The Canadian dollar has been weakening since December 8 when the Bank of Canada released a more cautious statement saying that they remain committed to holding the interest rate until the economic slack is fully absorbed. The exact wording of the first hike didn't change and it's still expected “in the middle quarters of 2022” while the market had already priced at least one hike by March 2022. Falling oil prices and higher risk aversion has put more pressure on the commodity currencies among which the Canadian dollar was the most vulnerable. Will the Bank of Canada hike before the FED hikes? It's still not that obvious. What's clear is that the inflation topic has become much more politicized in the US and the FED is forced to hike the interest rate to reestablish its credibility. BoC has less pressure to act immediately.
The Australian dollar was recently boosted by RBA's optimism. The governor Lowe said on December 12 that RBA was considering 3 options for bong buying program including ceasing the program in February if the economy continues to show better-than-expected progress. He also reiterated that RBA is not planning to increase interest rate until the inflation picks above the mid-point of the 2-3% inflation target range. RBA is less worried about the Omicron variant saying that it's not expected to derail the recovery. In addition, positive signs in the Chinese economy that we are seeing right now should improve the sentiment on AUD.
NZD was the second weakest currency of the week losing 0.40% against the basket of major currencies. NZD faced much larger correction due to being overbought by speculators as per CFTC data. Nevertheless, RBNZ remains one of the most hawkish central banks in the developed countries and it has already started its hiking cycle by increase rates twice in a row in 2020. RBNZ predicts that rates would hit 2.5% in 2023. If Omicron concerns fade away and the global growth recovers, the kiwi is likely to outperform the market as one of the high-yielding currencies. It can be an excellent carry trade in the future.
XAU trades above $1800 after the FED's meeting on December 15. Gold can be a excellent barometer of the market's sensitivity to interest rates. As the market reaction was not strong enough, we can assume that the interest rates do not drive markets at the moment. Gold is better known as an inflation hedge and it can outperform in inflationary and stagflationary enthronements. However, as the FED is about to start the hiking cycle, the upside on Gold can be limited in the long run.
WTI Crude Oil didn't manage to break above the monthly highs at $73 and it showed signs of weakness due to rising Omicron concerns and increased market volatility. The oil spread is still quite inverted and oil volatility index is elevated. Oil is likely to remain under pressure unless the market sentiment improves significantly.
Crypto markets continue to perform as risky asset and they depreciate due to 2 main factors: 1) increased market volatility and uncertainties around Omicron, 2) the FED's hiking cycle which is about to start in 2022. The recent flash crash was a major sign of weakness as Bitcoin didn't manage to recover quickly. Bitcoin continues to show weakness below $50K. It failed to break above this level multiple times. It's likely to continue its downtrend unless we see a strong breakout above the current trend line. The support levels are seen at $45'470 and $41'910.
Ether looks more resilient in comparison to Bitcoin and rebounds much stronger from its lows. It also recovered stronger from the flash crash that we saw on December 4. A breakout above $4200 would create a bullish case for ETH. The support levels are seen at $3640 and lower at $3465.