Forex Today: Risk-on flows dominate, benefitting risk-sensitive currencies at the expense of safe-havens

Here is what you need to know on Wednesday, December 23:

What began as a relatively subdued session for FX markets turned significantly more risk-on as the US trading session got underway, with the net result for G10 FX being outperformance of risk-sensitive currencies and underperformance of the havens. Sentiment took a turn for the better midway through Wednesday trade following strong US December Consumer Confidence and final Q3 GDP data, and amid a string of positive pandemic-related updates.

The US FDA approved Pfizer’s highly effective Covid-19 treatment pill (for “high risk” patients) and three new studies (one from South Africa, one from Scottish Universities and one from Imperial College London) all showed that infection with Omicron is significantly less likely to result in hospitalisation. Amid the broadly risk-on market tone that also saw global equities and commodities gaining ground, the US dollar thus weakened due to its safe-haven status. That pushed the DXY lower by about 0.4% to trade just above 96.00, though FX strategists will note that this is still well within December ranges and caution against reading too much into FX market moves amid pre-holiday thinned trading conditions.

The yen also performer poorly and, alongside the US dollar, made up the bottom two spots in the G10 performance table. By contrast, the risk-sensitive Aussie, kiwi, NOK and pound were the best G10 performers on the day, gaining between 0.7-0.9% on the session each. AUD/USD rose 60 pips to move back above 0.7200, NZD/USD gained 50 pips to move back above 0.6800 and GBP/USD gained nearly 100 pips to move above 1.3350, with each pair within a few pips of monthly highs. A mixed UK GDP report released early on during European trading hours did not faze GBP traders.

Elsewhere, CAD gained about 0.6% on the session versus the buck, pushing USD/CAD back below 1.2850, more than 100 pips below annual highs printed back on Monday above 1.2950. The euro, Swiss franc and SEK were all up about 0.4% versus the buck on Monday as a result of its risk-on related weakness rather than as a function of any domestic fundamentals. Generally, hawkish vibes from ECB policymakers who spoke on Wednesday does not seem to have shifted the dial much for the euro, with EUR/USD trading well within December’s 1.1240-1.1360ish ranges, though is worth noting.