Yen rallies, rand sinks as new Covid variant spurs flight to safety
The safe-haven yen rallied and the South African rand tumbled on Friday as investors turned cautious after Britain raised the alarm over a newly identified coronavirus variant spreading in the African nation.
The yen leapt as much as 0.56% to 114.68 per dollar, while the rand slumped to a more than one-year trough at 16.17 per dollar as concern flared about the B.1.1.529 variant, which might make vaccines less effective.
The risk-sensitive Australian dollar slid as much as 0.33% to a three-month low of $0.71265, ignoring a much-better-than-expected climb in retail sales.
“Covid worries are definitely playing a role in increasing demand for safe havens including the yen, and because South Africa is the location of this new variant, that’s an obvious reason to avoid the rand,” said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo.
The British pound slipped to a new 11-month low of $1.3305.
Meanwhile, the euro rose 0.12% to $1.12185, stabilizing after hitting its lowest level in nearly 17 months earlier in the week at $1.1186. Germany is considering following Austria’s lead and reimposing a Covid-19 lockdown with the continent once again the epicenter of the pandemic.
The dollar index — which measures the greenback against six peers, including the yen, euro and pound sterling — edged further away from Wednesday’s 96.938 — its highest level in nearly 17 months. It last traded at 96.715.
However, it was up 0.73% on the week, still headed for its fifth straight weekly gain.
Traders have ramped up bets that an increasingly hawkish Federal Reserve will lift rates by the middle of next year, while central banks in Europe, Japan and elsewhere stick to more dovish stances.
“If the Covid situation worsens, then dollar-yen could go down further, but otherwise the monetary policy divergence is definitely going to be weighing on the yen in the medium term,” said Kadota, who predicts dollar-yen will strengthen to 116 and beyond by the middle of next year.
On the flip side, 114 should provide a floor for the currency pair in the near term, “unless the world really changes for the worse,” he said.
Last week, Bank of Japan governor Haruhiko Kuroda reiterated his commitment to massive monetary stimulus, adding that the central bank stands ready to ramp it up further if necessary.
Overnight, minutes from the European Central Bank’s October meeting showed most policymakers leaning toward continued stimulus and a cautious approach to any policy changes, despite the pressure from heated inflation.
By contrast, money markets are pricing for a Fed rate hike by July, with good odds it could come in June.
A potentially crucial signpost for U.S. policy direction is due next Friday, with the release of monthly payrolls figures.
