The new analysis-Covid scare causes Reuters to rethink the rate in the markets

By Dhara Ranasinghe and Yoruk Bahceli

LONDON (Reuters) – The risk of a COVID-19 blow to economic activity is boosting expectations of a rate hike next year on the part of the world’s major central banks, with the most aggressive bets being the potential reversal of the dollar and other currencies.

Money markets no longer fully value the June 2022 Federal Reserve’s 25 basis point interest rate hike, nor is it set for a 10 bps rise from the European Central Bank by the end of 2022, the end of 2022. a few days ago.

And next month the Bank of England’s chances of raising rates are seen at around 53%, up from 75% on Thursday.

These changes led to the detection of a new variant of coronavirus in South Africa that led to more stringent border controls, as scientists wanted to determine whether the mutation was resistant to vaccines.

“While the central bank’s comments have focused on rising inflation risks, this (the new VOC variant) emphasizes that there are significant downside risks and that we are in a significant phase of uncertainty for the economy,” said Chris Scicluna, head of economic research. Daiwa.

Betting on the rate hike slips as the new COVID variant shakes the market: https://graphics.reuters.com/MARKETS-RATES/mopanleydva/chart.png

Echoing the panic in the markets when COVID was expanding early last year, oil prices fell more than 6% on Friday, shares in the travel sector fell by 6% or more, and two-year US Treasury yields fell 12 bps at its highest. Daily decline since March 2020.

Currency traders sided with the U.S. dollar and other strong expectations that the rate would rise, driven by higher inflation and stronger economies.

Now a shake appears on the cards.

He reached a 17-month high after President Joe Biden said Monday he would nominate Fed Chairman Jerome Powell for a second term. Then the minutes of the Fed’s November 2-3 meeting showed more politicians open to reducing asset purchases and raising rates.

So, considering the Fed’s three 25-point point hikes for 2022, speculators accumulated a “long” $ 20 trillion position in the dollar, according to data from the U.S. CFTC.

The positioning of the yen, the Swiss franc and the euro, on the other hand, has been declining, reflecting that the tightening of policy for these countries is far from over.

If the new variant of COVID disrupts the Fed’s policy, “the dollar could be slightly more vulnerable than the euro because we are already experiencing a two- to three-year rate hike from the Fed,” said ING Bank FX strategist Francesco Pesole. .

Yen positions: https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwndokpo/Pasted%20image%201637919367896.png

The significant decline in the yield on 2-year Treasury bills – a bond segment that is particularly sensitive to changes in interest rates – lowered its yield premium by 10 bps in Germany.

Not surprisingly, the yen and Swiss francs gained more than 1% against the dollar, and the euro rose 0.75% in one of its biggest daily jumps this year.

Some saw the movements as a verification of reality.

Arend Kapteyn, chief economist at UBS Investment Bank, said that although confidence in improving U.S. labor markets could be eradicated if a new variant takes hold, they are still early to measure impact.

But he added that “the market was too advanced in terms of the shortened taper window and several rises next year.”

US rate hikes: https://fingfx.thomsonreuters.com/gfx/mkt/movanlewdpa/USRP1.JPG

COVID IN THE TIME OF INFLATION

The new variant could complicate the role of central banks if it partially exacerbates supply chain delays attributed to rising inflation.

Britain, where inflation has hit 10-year highs, had policy tightening prices around 70 bps by mid-2022, despite a weak economic recovery.

But on Friday, the pound fell 0.6% against the euro; , and along with the Canadian dollar, the pound was the weakest rate to ease expectations, MUFG analysts predicted.

In Europe, new tensions could strengthen the pigeon hand in the ECB Governing Council.

Although the ECB is expected to reduce its emergency response to a $ 1.85 trillion ($ 2.08 trillion) pandemic emergency scheme, strategist Peter McCallum Mizuho now sees a greater opportunity to extend the program beyond the March deadline.

This approach was echoed in the bond markets of southern Europe, which are the biggest beneficiaries of the program. Italy’s 10-year borrowing costs fell below 1%, with the biggest drop in a day in three weeks.

“They (the ECB) were saying that the European situation does not change the outcome of the PEPP, but if there is a new variant that needs new vaccines, it will surely change the picture,” McCallum said.