FX Daily: A black black Friday | Article

Yesterday’s closure of the US markets for Thanksgiving caused most FX pairs to trade within very tight ranges. Today, markets will reopen but only for half a day, and should see another fairly low-volatility session today.

The general environment in FX remains remained quite supportive for the dollar, as the FOMC minutes and a bunch of good data kept market speculation on faster tapering and earlier tightening alive. On top of this, the worsening contagion situation in Europe and risk of fresh containment measures are generating further divergence in policy expectations between the ECB and Fed.

Overnight, we saw the highly oversold yen gain nearly 1% against the dollar while pro-cyclical currencies followed global stocks lower after the concerning news about a new Covid variant that appears to have the biggest mutation seen so far. The most notable previous Covid variants proved, in general, to be also more transmissible and more lethal than the first Covid strain, and scientists are attempting to evaluate whether this is the case as well. At a very early stage, the evidence seems quite concerning.

The variant has been identified primarily in South Africa, and multiple countries are rapidly blocking all flights to the country, as well as other African nations. The rand is unsurprisingly a major underperformer, having dropped to one-year lows and still looking quite vulnerable.

More information on the variant will be needed, but it looks like it is indeed going to be a very “black” Friday for global risk sentiment. JPY and CHF should remain a favourite choice as safe-haven hedges above the dollar, which should however remain supported against all the pro-cyclical bloc. NOK, AUD and NZD appear particularly at risk.