The overall tone of the equities markets is bullish, but the forex markets are currently mixed in their view. Other than the Bank of Canada and EIA news today we are probably going to have a quiet market assuming there are no new developments in the Omicron or Ukraine situations.
Despite closing off the day's highest levels, the US equity market closed higher for a second day on Tuesday. From yesterday's Asian trading session, markets continued to trade positively, with the Nikkei up nearly 1%, while the UK FTSE 100 is continuing to push higher in today’s London session. The bullish tone has carried on into today's London open as there is little scheduled economic news scheduled until this afternoon.
The markets appeared to be cautiously optimistic about the omicron variant, especially after US chief medical advisor Anthony Fauci said that the new variant is not necessarily more severe than delta. Index options implied volatility declined again but remains above a one-standard-deviation move based on the last six months.
After rallying eight percent in the previous two days, Brent oil prices retreated to below $75 per barrel as investors try to assess how the omicron coronavirus variant will affect global fuel demand. US inventories will be updated later in the day by the EIA.
The USDCAD has dropped as oil bounced off the support levels and is likely to keep moving as later today, the Bank of Canada (BOC) policymakers are likely to leave rates unchanged but continue to lay the groundwork for a 25bps rate increase as early as January. CAD will likely continue its recent upward trend under a hawkish tone, so I am looking for a drop in the USDCAD. If the BOC raises rates in January, they will be seen as one of the most aggressive central banks in the G10.
The forex heatmap is mixed with the euro and yuan catching a bid this morning while the NZD and yen are struggling. There is no clear risk-on or risk-off indication currently, so I would expect a slightly choppy forex market.
The AUDUSD is still traveling higher with some commentators saying this is a reaction to the Chinese RRR adjustment earlier this week, but also because the short Aussie trade was so crowded. When a trade gets skewed too much in one direction there is often some profit-taking and then maybe a short squeeze to get rid of some of the latecomers to the trade, who have weak hands.
ECB President Lagarde is making her first speech of the week at the 5th annual conference of the European Systemic Risk Board. There is unlikely to be anything market moving within the speech. What may move the markets more is the 10-year German bond auction.
The GBPUSD is still trading within a range and is starting to drift lower. There will be a UK COVID-19 press conference this morning, so that may move the pound. The UK government is under fire currently for its policies and hypocrisy. The worst-case scenario would be that PM Johnson loses the confidence of his cabinet and party and we have a resignation. Ministers are pulling out of interviews as the row around the No. 10 Christmas party from last year escalates.