The US dollar rallied on Monday against some but not all of the major currencies. Our readers should not find the rally in USD/JPY or decline in EUR/USD surprising because we talked about how a soft jobs report changes nothing for US policymakers on Friday who are laser focused on inflation.
Ten year Treasury yields recovered nearly all of Friday’s losses with the Dow Jones Industrial Average rising more than 600 points. We have now entered the pre-FOMC quiet period and barring any negative Omicron news, this coming Friday’s consumer price report will be the only market moving news on the calendar this week but even that may not trigger big moves in currencies.
Fed Chairman Powell made it very clear that high inflation needs to be addressed with faster taper—an announcement they are widely expected to make next week. There’s a very good chance Friday’s CPI report will reinforce their more aggressive intentions.
Meanwhile one of the best performing currencies yesterday was the Australian dollar. AUD/USD dropped below 70 cents before rebounding to end the day near .7050. With a Reserve Bank monetary policy announcement this evening, Yesterday’s move could be attributed to short covering and a hint of optimism on the Reserve Bank monetary policy announcement after the US close. The RBA wasn't expected to change policy—and didn't—as they’ve made it very clear that rates will remain unchanged throughout 2022. Thanks to fewer restrictions Australia's economy is recovering. Job ads surged 7.4% last month with firms ramping up spending plans.
So far, Omicron has not had a significant impact on the economy but minimally, the travel industry will be affected. China is the country’s largest inbound tourist market and provides a $12 billion contribution to the economy.
The worst performing currency was the euro. Not only are coronavirus cases rising across the continent but European nations respond more quicky with lockdowns and restrictions. As evidenced by the latest factory orders report, the Eurozone economy is underperforming the US factory orders plunged -6.9% in the month of October, which was much weaker than anticipated and foreshadows downside suprises in today’s German industrial production and ZEW survey.
Then second best performing currency was the Canadian dollar which shot higher on the back of rising oil prices. Crude jumped 5% to just under $70 a barrel. This recovery along with Friday’s strong labor market report are some of the many reasons why the Bank of Canada is expected to remain hawkish this week. Today’s Canadian IVEY PMI and trade balance reports are expected to reinforce the strength of Canada’s economy and the gains in the loonie. Further losses are likely in USD/CAD—which has formed a triple top on the daily chart. The improvement in risk appetite also drove sterling and the New Zealand dollar higher.