Currencies and stocks were trading steeply lower on Tuesday as Treasury yields hit their pre-COVID highs. Yields rose to their highest level since January 2020, while yields rose above 1% for the first time since February 2020. Despite weaker US data, these moves reflect growing expectations of a tightening of the Federal Reserve. The market went from a 60% chance of a rally in March to a full valuation of a move, with talk of a 50 basis point rally. Investors mocked that the Empire State survey of manufacturing conditions in the New York area turned negative for the first time since June 2020 or that US prices fell 1.9% in December, which it is much worse than the forecast of -0.1%. Inflation is high as currency prices hit their highest level since 2014. Currencies and stocks have fallen sharply as investors fear businesses could suffer if the Fed raises interest rates at a time when data fades.
The first Federal Reserve meeting of 2022 is actually next week. March is seen as the “live” meeting where the Fed could raise interest rates. And, with Omicron cases on the rise around the world, waiting until March is the most sensible decision. However, there is little chance of an early adjustment in January, and the risk of a more aggressive tightening, in the form of a hike in January or a 50bp hike in March, scares investors. There isn’t much US data to move the market this week, but the outlook for the US economy and monetary policy appears to be driving currency flows.
Ironically, it was the worst performing currency. The German showed an unexpected improvement in business confidence, which was supposed to lift the euro, but as US stocks started to plummet, the euro quickly followed. France has reported 464,769 new cases of COVID in the last 24 hours, the highest level ever reached. Italy also recorded a record of 228,179 cases, almost three times more than the previous day. So while some companies are optimistic that COVID fears will fade, lingering concerns about viruses could limit consumer demand. The European Central Bank is one of the most pessimistic central banks and, despite the Fed’s aggressive stance, the ECB will not change course in the short term.
The best performing currency was the. The Bank of Japan left its monetary policy unchanged this week, raising its inflation forecast but lowering its growth forecast. He has made it clear that he has no plans to raise interest rates. However, the yen does better when stocks fall and risk appetite deteriorates.
The rally in oil also outperformed. Crude oil prices have risen in four of the last five trading days to their highest level since 2014. The CAD rally would likely have been even stronger had the start of Canadian real estate activity not fallen more than expected in December. However, the Bank of Canada is expected to be one of the next central banks to open the door to tightening. Consumer prices are expiring today and, according to the IVEY PMI, price growth accelerated in December. USD / CAD has flirted with 1.25 for the past few days and a strong CPI could be what the bears need to push the pair below this key level.
The Australian and New Zealand dollars traded sharply lower on the back of risk aversion and weaker data. In Australia, consumer confidence has fallen sharply due to the rise in coronavirus cases. In New Zealand, business confidence fell on fears of rising inflationary pressures.
The British pound is in the spotlight this week, with data on employment, inflation and consumption. Yesterday’s employment report was mixed, with the unemployment rate improving and the employment picture weakening. Inflation data is expected to be released today and, as in Canada, the pressure for another Bank of England hike is likely to increase. According to the PMI indices, which may be a leading indicator of the CPI, prices have peaked in the manufacturing and services sectors. The British pound traded lower against the US dollar and Japanese yen yesterday but resumed its rally against the euro. It has been trading in a tight range since the beginning of the year, but a breakout is very likely to occur.