Weak US Payrolls, Omicron fears sink stocks; Aussie KO’d

VIX Index Soars, Bond Yields Tumble; DXY Flat, Yen Climbs

Summary: Welcome to December markets! The last year of the month, while historically good for assets markets, often sees a rise in FX volatility. Many of the large global bank trading desks thin out as dealing staff take their Christmas and New Year breaks. Friday was no different with FX volatility soaring following the release of a dismal US Payrolls report. In November, the US economy added a total of only 210,000 jobs, less than half of a median forecast of 558,000 expected. While October’s number was revised up by 15,000, Wages (Average Hourly Earnings) fell to 0.3% against expectations of 0.4%. Investor fears that Omicron, the new variant of Covid will be more transmissible than Delta, continued to weigh on asset markets. The VIX Volatility Index (VIX), a popular measure of the stock market’s expectation of volatility soared 9.73% to 30.67. Risk leader the Australian Dollar (AUD/USD) was KO’d, plunging 1.22% to 0.6999 from 0.7090 on Friday. On the other side of the spectrum, the haven darling Japanese Yen climbed 0.23% against the Greenback. USD/JPY was last at 112.75 (113.15 Friday). The Dollar Index, which measures the value of the Greenback against a basket of 6 major currencies, finished little changed at 96.17 from 96.12 on Friday. Sterling (GBP/USD) slid 0.48% lower to 1.3235 (1.3300) as traders continue to view the Bank of England as less hawkish than the US Federal Reserve. The Euro (EUR/USD) though was flat at 1.1305 from 1.1300. New Zealand’s Kiwi (NZD/USD) tumbled 0.90% to 0.6750 (0.6809) on the back of a weaker Aussie and fall in asset markets.

US Treasuries soared and bond yields fell. The benchmark US 10-Year rate closed at 1.34% (1.44% Friday) while the 2-year bond yield dipped 3 basis points to 0.59%. Germany’s 10-year Bund yield fell to -0.39% from -0.37%. The UK 10-year Gilt rate tumbled 7 basis points to 0.74% (0.81%).

Wall Street stocks tumbled. The DOW closed at 34,550 from 34,670 while the S&P 500 dropped 1.15% to 4,533 (4,583 Friday). Japan’s Nikkei lost 0.87% top 27,757 (27,890 on Friday).

• AUD/USD – slip-sliding away, the traditional risk leading FX, the Australian Dollar took a hit to the chin, plunging 1.22% to 0.6999 (0.7090). Overnight, the Aussie Battler was battered to low at 0.6993 before settling to its New York close. Weaker Chinese Caixin Services PMIs and broad-based USD strength weighed on the Aussie.
• USD/JPY – haven darling Japanese Yen outperformed, climbing 0.24% higher against the Greenback. The USD/JPY pair closed at 112.75 from 113.25 on Friday. Overnight low traded was at 112.56. Japan’s November Jibun Bank Services PMI rose to 53.0 from 50.7 previously.
• GBP/USD – the British currency finished lower against the US Dollar to 1.3235 from 1.3300 on Friday. The risk-off stance weighed on Sterling which hit an overnight low at 1.3209 before a modest rally in late New York trade. Trading was choppy with the overnight high recorded at 1.3310.
• EUR/USD – the Euro rebounded from its overnight low at 1.1267 to close in New York at 1.1305, little changed from Friday’s open at 1.1300. A drop in the Eurozone and German Final Services PMIs in November weighed on the shared currency.

On the Lookout: The economic calendar for the week ahead kicks off with a light data release today. However, this will pick up from tomorrow onwards. In the events calendar, Australia’s RBA holds its Interest Rate Policy Meeting tomorrow, which will be the final one for 2021. The Bank of Canada’s rates policy meeting is scheduled for Wednesday (early Thursday morning in Sydney).

Australia kicks off today’s data releases with its M1 Inflation Gauge (no f/c, previous was 0.2%). New Zealand follows with its ANZ Commodity Prices for November (y/y no f/c, previous was 23.7%). Australia releases its ANZ November Job Advertisements (no f/c, previous was 2.1%). Europe starts with Germany’s October Factory Orders (m/m f/c -0.2% from 1.3% - ACY Finlogix), German Construction PMI (no f/c, previous was 47.7). Italy follows with its October Retail Sales (m/m f/c 0% from previous 0.8%), Eurozone Sentix Investor Confidence Index (f/c 15.9 from 18.3 – FX Street).  The UK follows with its UK November Construction PMI (f/c 52.0 from 54.6 – FX Street). Bank of England Deputy Governor Jim Broadbent is scheduled to speak on the outlook for growth, inflation and monetary policy at Leeds University, England).

Trading Perspective: Despite a weak US Payrolls report and continued uncertainty on the Omicron variant of Covid, the Greenback kept its overall bid tone. Reuters reported that Net US Dollar long bets jumped to their highest since mid-June 2019 according to the latest COT/CFTC data. For the week ended 30 November, the value of speculative net long USD long positions was at +USD 23.99 billion, up from +USD 22.11 billion the previous week. Despite the emergence of Omicron, the hawkish bent from US Federal Reserve Chair Jerome Powell emboldened traders to increase their long bets. These expectations are now fully priced into current FX levels, and it will be difficult for the Greenback to post any further significant gains versus its rivals. After trading to an overnight high at 96.45, the Dollar Index slipped to close at 96.17, little changed from its opening at 96.12.

• AUD/USD – After being KO’d against the Greenback and its other Rivals, the Aussie Battler settled at 0.6999 at the New York close from 0.7090 Friday. Overnight, the risk leading Aussie Dollar traded to a low at 0.6993 before stabilising. Immediate support for the AUD/USD pair lies at 0.6990 followed by 0.6960. Immediate resistance can be found at 0.7030, 0.7060 and 0.7090 (overnight high traded was at 0.7090). Look for further choppy trade in the Aussie today. The latest Commitment of Traders report saw net Aussie short bets increase to -AUD 80,185 from -AUD 63,265 in the latest week to 30 November. Likely range for today 0.6985-0.7085. Aussie shorts are a bit overdone, so the preference is to buy dips… but don’t hold on to any positions for long.

(Source: Finlogix.com)

• USD/JPY – The Dollar edged lower against the haven sought Japanese Yen to finish at 112.75 (113.25 Friday). Overnight the USD/JPY traded to a low at 112.56. Immediate support lies at 112.50 followed by 112.20. Immediate resistance for today is found at 113.10, 113.40 and 113.70. Likely range today 112.50-113.50. Choppy, but there’s good money to be made trading the range on this puppy.
• EUR/USD – While the Euro finished little-changed at 1.1305 (1.1300 Friday), the overnight range traded was between 1.1267 and 1.1333 in volatile fashion. For today, immediate support can be found at 1.1285 and 1.1255. On the topside, immediate resistance lies at 1.1330 followed by 1.1360 and 1.1390. The latest Commitment of Traders report saw net Euro short bets increased in the latest week ended 30 November to -EUR 23,240 from a previous -EUR 16,452. A bit of caution on the downside however the preference is to sell Euro rallies. Likely range today 1.1250-1.1330.
• GBP/USD – Sterling slid under the weight of broad-based US Dollar strength, closing 0.48% lower to 1.3235 (1.3300). Overnight low traded was at 1.3209, which puts today’s immediate support at 1.3200. The next support level is found at 1.3170. On the topside, immediate resistance is found at 1.3270, 1.3300 and 1.3330. The latest Commitment of Traders report (week ended November 30) saw net short GBP bets increase slightly to -GBP 38,899 from the previous week’s -GBP 34,579 contracts. Look for Sterling to trade a likely range of 1.3200-1.3300. Be nimble, trade the range, don’t fall in love with any positions.

Welcome to December! Wishing all a good trading week ahead, happy Monday, happy days...