January 2022 Market Wrap

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The Dollar extended its rally to reach levels not seen since July 2020, supported by a hawkish Fed and a risk adverse environment which buoyed demand for the safe-haven currency. With Fed gearing up to hike interest rates in March alongside its plans to end its bond purchases in that month, we could see the Dollar hold on to its gains amid a fragile risk environment.

Escalating tensions between Western and Russian leaders over Ukraine left the Euro battered as investors fret over a potential military conflict. The renewed restrictions imposed to contain the Omicron variant also dented prospects in the Euro zone’s service sector, with services PMI numbers reaching a nine-month low as prices continue to rise. Elsewhere, inflation rate in the U.K. reached a near 30-year high recently, prompting expectations of interest rate hikes by the Bank of England in its upcoming meeting.

Commodity currencies plummeted amid the risk aversion, with New Zealand Dollar being the worst performer despite its strong domestic growth. Rising inflationary pressure, with annual inflation at 5.9%, the highest level seen in three decades, alongside a tightening jobs markets could put pressure on the RBNZ to accelerate its interest rates hikes.

Elsewhere, Bank of Canada left its interest rates unchanged in its latest meeting, but signalled interest rates hikes ahead. Rising oil prices, exacerbated by supply chain disruptions due to geopolitical risks in Ukraine could also provide support for the Canadian Dollar. Gold prices erased January’s gains on the back of a stronger Dollar and prospects of higher interest rates which increases the opportunity costs of holding the non-yielding asset.

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