Dollar bulls came charging out of the gate on the first day of the 2022 trade. The greenback moved sharply higher against all of the major currencies, with USD/JPY closing in on a 4-year-high. Yesterday’s dollar rally was driven entirely by the jump in Treasury yields. 10-year yields rose above 1.6%, the first time in more than a month, while 2-year rates rose to the highest level since March 2020. The prospect of three rate hikes from the Federal Reserve this year is finally creating demand for the dollar. December was a tough month for the greenback despite the central bank’s hawkish guidance.
In the New Year, investors are less concerned about the economic impact of Omicron, which appears to be less deadly than past variants, and as a leading title on Wall Street Journal suggests, “Omicron variant may end up saving lives” because the less-lethal fast-moving virus could push us to herd immunity. This week’s economic events are also expected to highlight the dollar’s appeal. We expect hawkish FOMC minutes and a good jobs report on Friday. Don’t expect today’s ISM manufacturing report to help the greenback, however, as the Philadelphia region reported significantly weaker growth.
The commodity currencies were hit the hardest by the dollar’s rise, with the Australian dollar losing nearly 1 percent of its value. Australian markets were closed on Monday but record COVID cases combined with the suspension of China Evergrande Group’s (HK:3333) share trading in Hong Kong hit AUD and NZD hard. With that said, the Australian government said the milder impact of the Omicron strain allows them to push ahead with reopening plans.
According to Prime Minister Morrison:
“We have to stop thinking about case numbers and think about serious illness, living with the virus, managing our own health and ensuring that we’re monitoring those symptoms and we keep our economy going.”
Unlike Australia, COVID-19 cases in New Zealand remain well under control, with new infections stabilizing for the past month. This means that should there be a recovery in risk appetite, NZD should recover quickly.
This is also a busy week for the Canadian dollar traders with a December jobs report, IVEY PMI, and trade balance scheduled for release. USD/CAD traded sharply higher on Monday on the back of U.S. dollar gains, and there’s room for further recovery.
Although oil prices extended higher, it will be very difficult for Canadian job growth to match last month’s blockbuster rise. The Federal Reserve could also raise interest rates before the Bank of Canada.
Compared to the other major currencies, euro and sterling were more resilient. With a dovish central bank and subdued data, we are surprised that EUR/USD is trading above and not below 1.12. Europe has been hit hard by COVID-19, and unlike other countries that continued reopening, many euro area nations tightened restrictions.
Going into the busy holiday season, this tough stance will be reflected in data. Sterling, on the other hand, deserves to outperform. Not only did the Bank of England surprise with a rate hike in December, but the U.K. government doesn’t feel that new measures are needed because Omicron is “plainly milder” than other variants, according to Boris Johnson.
Although January typically brings U.S. dollar weakness, the greenback should outperform this week with the possibility of further gains as the month progresses.