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G10 FX Calmer, But Fragility Clear Looms Beneath the Surface

FOREX
  • Markets trade on a calmer footing early Wednesday, with equities higher and haven currencies on the backfoot. This has extended the recovery in USD/JPY off yesterday's lows of 112.53 to put the pair either side of 113.50 at the NY crossover.
  • Despite the consolidation among spot rates, implied vol measures remain elevated, suggesting some fragility below the calmer surface of currency markets so far Wednesday.
  • Markets are taking the news that the omicron variant has spread further in its stride, with focus shifting to any incoming data on vaccine efficacy or elevated side effects resulting from the new strain.
  • Growth proxies and commodity-tied FX outperform, putting AUD, NZD at the top of the G10 pile. This puts NZD/USD around a point above the YTD lows printed yesterday at $0.6773, which remains key support.
  • Data may take some focus going forward, although releases could be taken with a pinch of salt given the recent emergence of the omicron variant. ADP employment change data crosses, shortly followed by the ISM manufacturing survey for November. Both are expected to come in broadly inline with previous readings.
  • Powell and Yellen testify for a second time on the CARES Act, which normally wouldn't phase markets, but extra attention may be paid given the volatility prompted by Powell's appearance yesterday.
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