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Markets were ghosted by a wave of risk aversion on Monday, only safe-havens benefitted but risk-sensitive currencies were hurt, though the latter group had pared back on much of their earlier underperformance by the end of US trading session as risk appetite recovered.
The US dollar was the safe haven of choice and the top-performing G10 currency of the day, with the DXY rising about 0.3%, though in the end failing to hold above the 96.00 level as risk-appetite recovered later in the session. Nonetheless, it reached its highest point in two weeks, aided by hawkish Fed, while
Economic Data
Much weaker than expected flash Services PMI data was shrugged off as a result of the temporary Omicron impact rather than any underlying economic weakness.
According to a preliminary January survey by IHS Markit, Service PMI fell to 50.9 this month from 57.6 in December. That was much larger than the expected decline to 55.0 and marked the lowest reading since July 2020.
IHS Markit’s Manufacturing PMI also fell more than expected to 55.0 from 57.7 versus forecasts for a drop to 56.7. That marked the lowest such reading since October 2020. The Composite Index fell to 50.8 from 57.0, its lowest since July 2020.
US inflation expectations, as measured by the 10-year breakeven inflation rate according to the St. Louis Federal Reserve data, rose for the second consecutive day to 2.38% by the end of Monday’s North American session.
The inflation gauge extends rebound from a four-month low flashed last week ahead of the key Fed Interest Rate Decision as well as Fed’s Monetary Policy Statement scheduled for Wednesday.
Other Developments
Geopolitical concerns about the rising risk of a new Russian/Ukrainian military conflict and equity investor worries about Fed tightening were the main drivers of the broadly downbeat tone on Monday.
At the time of writing, WTI picks up bids towards $84.00, extending the late Monday’s recovery during the initial Asian session on Tuesday. The oil benchmark’s latest recovery takes clues from a bullish Doji candlestick and Momentum line.
Oil prices fell about 2% on Monday, hit by investor concerns over the possibility of quicker than expected interest-rate hikes by the US Federal Reserve that took down risk markets such as equities while the dollar rallied.
Wall Street stocks slumped, after last week posting their worst week since 2020, pulling down other risk assets like crude.
Everything is being taken out to the wood shed and the wood shed is a pretty crowded place. Brent crude fell $1.62, or 1.8%, to $86.27 a barrel, while WTI crude settled down $1.83, or 2.2%, to $83.31.
As it became clear that the risk asset selloff, as US equities were the leading asset, buyers returned to the market and the major US equity indices enjoyed a robust intra-day recovery from lows. The S&P 500 ended the session 0.3% higher, up an incredible 4.5% versus earlier intra-day lows.
The hardest risk-sensitive currencies recovered as the AUD/USD, which had dipped as low as the 0.7090s where it traded over 1.1% lower, recovered back to the 0.7140 area, down a comparatively modest 0.5% on the day.
Coming up on Tuesday, the AUD traders will be watching key Q4 Consumer Price Inflation data that could, if hotter than expected, bolster hawkish RBA policy bets and further facilitate the rebound.
USD/CAD, which had risen as much as 1.0% to above 1.2700, was last trading in the 1.2630 area, up about 0.4% on the day. NZD/USD, which was last down 0.2%, recovered back to 0.6700 from an earlier dip as low as the 0.6660 mark, which was its lowest point since November 2020. NZD traders also await key Consumer Price Inflation data for Q4 out on Thursday.
Finally amongst the more risk-sensitive G10 currencies, GBP/USD recovered back to the 1.3480s from a brief dip below 1.3450, where it continues to trade lower by about 0.5% on the session.
JPY, EUR and CHF all look on course to end the day about 0.2% lower versus the buck, with EUR/USD holding above 1.1300, USD/JPY rising back to the 114.00 area and USD/CHF rising back towards 0.9150.
Tensions in Ukraine have been increasing for months after Russia massed troops near its borders, fueling fears of supply disruption in Eastern Europe. In the Middle East, the United Arab Emirates intercepted and destroyed two Houthi ballistic missiles targeting the Gulf country on Monday after a deadly attack a week earlier.
Bitcoin rallied on Monday afternoon, trading above $37,000, after falling to a seven-month low in the morning, as the cryptocurrency moved in lockstep with a swift rally in risk assets.
Bitcoin was trading at $36,800 at 5 p.m., up, 4.7% on the day. In the morning, it traded below $33,000 for the first time since July. That extended its selloff to a more than 50% loss from its record high of $68,990.90, set on 10 November.
Also Read:
Bitcoin Bounces Back After Falling Below $33,000
Oil falls 2% as Fed rate hike talk ghosts risk markets
US inflation expectations extend bounce off four-month low
AUD/USD Rebounds Ahead of Australia inflation Data
Risk-Sensitive Currencies Survive Market Mood
GBP/JPY Steadies Amid Downbeat Market Sentiment
Why Might Fed’s Meeting Shock Financial Markets?
Can Fed’s Policy Meeting Really Deter Inflation?
USD/CAD Rallies Amid Broad Risk Asset Retreat
US Equities Hit lowest Level Since July
The US Dollar Benefits From Russian-Ukrainian Tensions
