Overnight Headlines

*Omicron hospitalisation risk is far below Delta’s in two studies

*Biden plans to run for re-election in 2024 “if I’m in good health”

*Dollar drops as optimism on economic outlook saps haven demand

*Global share rally continues in Asia, US consumer confidence improved

USD fell for a third day in line with the “risk on” mood in the market. The DXY is dropping again this morning with losses fairly broad based. The euro has gained for four straight sessions and trades above 1.13 again. GBP is pushing up to one-week highs at 1.3374. AUD, the risk proxy in the FX space, is up over 1.1% this week to near one-month highs at 0.7229. USD/CAD dropped sharply after posting a year-to-date high at 1.2963 on Monday.

US equities posted good gains adding to the big Tuesday rally. Data showed consumer confidence improved further in December. Growth and tech led the way with the Nasdaq up 1.2% and the S&P500 up 1%. The Vix dipped back below 20 having popped up to 27 at the start of the week. Asian markets are mildly in the green with US futures pointing the same way.

Market Thoughts – Positivity into the holiday period

Risk appetite is being driven solely by Omicron news as liquidity thins and trading desks go into holiday mode. Investors are taking cheer from positive signs about Omicron as recent data indicate the worst case is unlikely. Transmission rates are reportedly higher (the UK topped 100k infections yesterday) but this variant seems less virulent and less prone to cause serious illness and death.

The market is certainly taking a half full view. A less dangerous variant hopefully means less need for severe restrictions and more normal activity. Consumption behaviour may be impacted less dramatically than thought and bottlenecks may ease in time if labour markets are not hindered. That said, the data is still limited. The key question is whether herd immunity can be reached without overwhelming hospitals.

Chart of the Day – AUD/JPY pushes on up

“Risk on” over the last few days has helped AUD/JPY, the FX bellwether, advance for a third day so far this week. After falling at the start of the month to a near four-month low at 78.78, the pair bounced back quickly to 81. The pair has traded around this level for a few weeks but below trendline resistance from the March 2020 low.

This week’s rally sees the pair now above the halfway mark of the October to December move at 82.51. Crucially prices are also beyond the rising trendline at 82.10. The 200-day SMA sits bang on current prices at 82.64. Beyond here, targets include 83.40 if the risk rally continues.