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Mixed risk tone after rally, BoC meeting in focus

December 08,2021 07:31:36

Overnight Headlines

*Japan GDP shrinks more than first estimated during summer Covid

*Asian shares catch global equity rally, but oil slips

*US stocks jumped on hopes Omicron won’t derail the global recovery

USD closed modestly lower as risk-sensitive currencies gained while safe -havens suffered. USD/JPY rose, alongside higher US Treasury yields, closing at a one-week high. EUR and GBP dipped with a low in the latter at 1.1227 before closing at 1.1267. AUD surged over 1% to close just on the down trendline from the late October high at 0.7118.

US equities rebounded strongly with the S&P500 rising by 2.1%, the most in nine months. The tech/growth-heavy Nasdaq rallied 3% with the Vix dropping sharply, below 22. Asian stocks are in the green despite some less positive news around another Chinese property developer. European futures are flat to start the day with US futures mildly in the green.

Market Thoughts – Will the Bank of Canada look through Omicron?

The BoC will meet for the final time this year and is forecast to keep its benchmark rate unchanged at 0.25%, having announced the end of QE at its last meeting. A booming labour market and GDP, sky-high inflation and a thriving housing market would normally see a hawkish response from policymakers.

Indeed, the market is back to pricing in close to five rate hikes next year, with some predicting a first move in January. This tallies with the bank indicating a first rate hike in the middle quartets of 2022. Of course, since then data has beaten expectations consistently. Yet a cautious approach is being touted with the lingering uncertainty around the risks and economic impact of Omicron.

Chart of the Day – USD/CAD plunges on positive risk appetite

CAD has recovered some of its recent losses this week as the rebound in risk and oil prices has helped the loonie. Market sentiment is certainly still volatile, as the Omicron news can change in an instant. If the BoC take this side and signal risks from current policy plans, then CAD will get sold. The flip side, similar to the RBA and AUD yesterday, may see the bank looking through the near-term variant risk.

USD/CAD had been in a bull channel after six solid weeks of gains. But this week has seen a sharp reversal with summertime resistance above 1.28 again doing a job. The 50% retracement of the October/December dollar rise will offer support at 1.2571. The 100-day SMA sits just above here.  Resistance is in the high 1.27s and the barrier around 1.28.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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