Forex Today: Euro, havens strong amid risk aversion whilst Lira enjoys massive rally

What you need to know on Friday, December 21:

On a broadly risk off day that would normally be expected to benefit the traditional forex safe havens like USD and JPY, the euro was the standout performer. EUR/USD rallied 0.4% after bouncing at support in the form of recent lows, though was not able to hold to the north of the 1.1300 level. CHF also performed well, rallying 0.3% versus the buck, while USD/JPY was about 0.1% lower but remained close to the 113.50 level.

As a result of the strong euro and modestly stronger yen, the DXY was lackluster, dropping 0.1% on the day, though remaining close to 96.50 and recent highs. But losses in risk and commodity-sensitive currencies (as a result of risk-off conditions) cushioned the DXY somewhat.

The Canadian dollar was the worst performer of these amid selling pressure and choppiness in crude oil markets and dropped 0.4% on the day versus the dollar. USD/CAD even managed to print fresh annual highs in the 1.2960s, surpassing the previous annual high set back in August close to 1.2950, though has since pulled back to consolidate in the 1.2940 area.

AUD/USD, meanwhile, was down about 0.1% on the session and content to spend most of it consolidating just to the north of the 0.7100 level. Aussie traders will be looking ahead to the release of the minutes of the last RBA meeting at 0030GMT on Tuesday, with traders are on notice for further hints from the RBA that it will pivot in a hawkish direction.

It seems to be a fairly consensus view now that the RBA will completely axe its QE programme in February in wake of last week’s much stronger than expected Australia November labour market report. The timing of rate hike is also a key theme, with markets expecting the RBA at some point to indicate that a first post-pandemic hike might come as soon as 2022 rather than the current 2023 guidance.

NZD/USD, meanwhile, was down 0.3% after probing, but ultimately remaining supported above, support in the form of annual lows at the 0.6700 level, whilst GBP was down about 0.2% on the day versus the buck. GBP/USD again found support at recent monthly lows in the 1.3170s area and closed out US trade slightly to the north of 1.3200 as speculation intensifies about impending UK lockdowns to stem the rising Omicron tide. It seems a lockdown this side of Christmas (on Saturday) is unlikely, but after that, anything goes and UK PM Boris Johnson in a speech earlier in the day made clear nothing was off the table.

Finally, in emerging market FX, the standout currency was the Turkish lira, which saw an immense 25% intra-day pull back from session highs in the 18.30s to end the US session around 13.50. The rapid appreciation of the currency was prompted as President Recep Erdogan announced unorthodox new policies to alleviate the impact of exchange rate volatility on Turkish savers.

Most importantly, the President announced that the government would offset losses to domestic TRY accounts as a result of the depreciation of the TRY/USD exchange rate. Some analysts and traders have said that these anti-dollarisation measures amount to a “hidden” interest rate hike, funded via the public purse.