Currency rates react to Omicron: the dollar is weaker, the franc gets stronger (Daily analysis 29.11.2021)

29 Nov 2021 8:12|Bartosz Sawicki

Omicron, a new variant of the coronavirus, caused panic on the financial markets. The price of crude oil plunged by 10 dollars, while the quotations on world stock exchanges plunged. Risky currencies are losing ground, but the dollar is also in trouble.

Although panic among investors may have been amplified by the long weekend in the United States, uncertainty about the spread of this variant, its mortality and its impact on economic processes may persist for some time. After all, its reliable testing is not a matter of hours but rather of weeks. The crash in the oil market has put even more pressure on the rouble than on the zloty, but also on the Norwegian krone, which on Friday was at its lowest price in weeks. The franc is also strong; the EUR/CHF has moved away from 1.05. Apart from new epidemic reports, the most important event on the global markets will be Friday's US labour market report. It should confirm the excellent condition of the US economy and indicate an increase in non-farm employment by about half a million jobs.

Dollar exchange rate subject to a non-obvious reaction

Traditionally, it is assumed that the outbreak of anxiety and the disappearance of risk appetite is the environment in which the dollar appreciates. This time, turbulent moments on stock and commodity exchanges are accompanied by a retreat from the US currency. The EUR/USD has rebounded from long-term lows by more than 1% and towards the 1.13 level. Expectations of monetary policy are primarily responsible for this reaction.

In the middle of last week, the belief was strengthening among investors that the Federal Reserve's asset purchases would be swiftly put to rest and that there could be two rate hikes next year. The appearance of a new wave of epidemic risk on the horizon casts doubt on such ambitious expectations. In the case of the single currency, such a phenomenon does not occur, as no rate movement was expected earlier than the second half of 2023 anyway. This confirms our conviction that the bold valuation of the Fed's intentions may become a burden for the US currency and limit the room for its further appreciation.

Other reasons for non-obvious EUR/USD rises

There have also been additional factors that may have hit the dollar in similar circumstances to Friday's plunge in the past. These have been runaway markets where trends have been very advanced, and one side of the market has prevailed among speculative-minded investors. This was the rally of the US currency in previous weeks. In other words: in a moment of panic, the tendency to take profits intensifies.

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