Stock indices around the globe continued to march north on Tuesday and during the Asian session Wednesday, more reassuring evidence that the Omicron coronavirus variant is not as dangerous as initially thought.
Today, the BoC decides on monetary policy, and we believe that they will maintain a positive stance, allowing participants to keep expectations over a rate hike soon elevated.
USD Retreats Further, Stocks Rally on Reassuring COVID Headlines
The US dollar traded lower against all but two of the other major currencies on Tuesday and during the Asian session Wednesday. It gained only versus GBP, while it traded virtually unchanged against EUR. The greenback lost the most ground versus CAD, AUD, and NZD in that order.
The weakening of the US dollar and the strengthening of the risk-linked Loonie, Aussie, and Kiwi, suggest that markets continued trading in a risk-on fashion yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of green, gaining on average 2.28% each. The optimism, albeit somewhat softer, rolled over into the Asian session today as well.
It seems that worries over the Omicron variant of the coronavirus continued to ease after British drugmaker GSK said that its antibody-based COVID-19 therapy with US partner Vir Biotechnology is effective against all mutations of the Omicron variant.
What’s more, a South African study suggested that a booster dose of the Pfizer vaccine could help protect against the variant, even though the study showed that the new strain could partially break the protection of two doses. The news came after a South African official said over the weekend that the symptoms of the Omicron variant were mild, with US infectious disease official Anthony Fauci sharing the same view.
More official evidence that the new strain is not as dangerous as initially thought to increase the chances for the World Health Organization to arrive at the same conclusion as well, and that’s why we see investors increasing their risk exposure massively.
We switch to positive as well, and we see the case for some equity indices to conquer fresh record highs. However, we remain reluctant to call for a long-lasting advance, as new findings pointing to more severe Omicron infections could result in stress and anxiety again, thereby another round of risk aversion.
S&P 500 – Technical Outlook
The S&P 500 continued climbing yesterday, breaking above the downside resistance line taken from the high of Nov. 22, as well as above the key resistance (now turned into supports) of 4655 and 4670, marked by the highs of Dec. 1 and Nov. 29, respectively. In our view, this has changed the near-term outlook back to positive.
We believe that market participants will soon target the peak of Nov. 25, at 4720, the break of which could allow another test at the index’s record high of 4744, hit on Nov. 22. If they are not willing to stop there this time around, we may see them pushing towards the psychological round figure of 4800.
We will consider the outlook to have deteriorated again upon a break below 4607, marked by the inside swing high of Dec. 3. This could confirm the index’s return back below the aforementioned downside line and could allow declines towards the 4560 territory, marked by the low of Nov. 30, the break of which could extend the fall towards the lows of Dec. 1 and 3, at around 4500.
Will the BoC Sound Optimistic Again Today?
As for today, the main event on the agenda may be the BoC interest rate decision. At its latest meeting, this Bank unexpectedly ended its QE program, maintaining an optimistic stance. Data since then showed that Canada’s labor market continued to improve in October and performed even better in November.
The economy added much more jobs than the forecast suggested, and the unemployment rate slid to 6.0% from 6.7%. Both the headline and core CPIs for October accelerated further above the upper end of the BoC’s target range of 1-3%, while GDP data revealed that the economy rebounded by much more than anticipated in Q3.
This data suggests that the BoC could maintain an upbeat tone, allowing expectations that a hike could be looming in upcoming months to stay elevated. However, it remains to be seen whether the new coronavirus restrictions would affect policymakers’ approach.
It is too early for them to switch to a more cautious stance. They may prefer to wait for upcoming data before they arrive at safer conclusions about the impact of the coronavirus on the domestic and global economies. For now, we expect them to stay optimistic, something that could support the Loonie at the time of the release.
USD/CAD – Technical Outlook
USD/CAD had been in a tumbling mode since Monday, when it broke below the upside support line taken from the low of Nov. 10. That said, the slide was paused today near the 1.2635 area. Even if we experience further declines, the pair is still above another upside support line, taken from the low of Oct. 21, and thus, we see chances for a rebound in the foreseeable future.
A break below 1.2635 could extend the fall towards the 1.2590 zone, which provided support on November 18th and 19th, or towards the aforementioned upside line taken from the low of Oct. 21. The bulls could retake charge from near one of those key support zones, and perhaps push the action back above the 1.2635 barrier.
Such a rebound could see scope for extensions towards the 1.2720 area, which provided support between Nov. 29 and Dec. 1. Another break above 1.2720 could advance towards the 1.2780 zone, marked by the inside swing low of Dec. 2.
Now, to start examining whether the bears have gained complete control, we would like to see an apparent dip below 1.2480, support marked by the inside swing highs of Nov. 5 and 9. This could also confirm the break below the upside line taken from the low of Oct. 21 and encourage the bears to dive towards the low of Nov. 10, at around 1.2392. A break lower could extend the fall towards the low of Oct. 29, at 1.2370.
As for the Rest of Today’s Events
Besides the BoC decision, the only other releases worth mentioning are the US JOLTs job openings for October and the EIA report on crude oil inventories for last week. The JOLTs are expected to have declined slightly, while the EIA forecast points to a 1.705mn barrels decline, following a 0.910mn slide the week before.
As for the speakers, apart from BoC Governor Tiff Macklem, who will speak at the press conference following his bank’s decision, we will also get to hear from ECB President Christine Lagarde, ECB Vice President Luis de Guindos, ECB Executive Board member Isabel Schnabel, and ECB Supervisory Board Chair Andrea Enria.