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Yen, franc surge as new virus variant rattles markets

26-Nov-2021 12:33:00

LONDON (Reuters) - The discovery of a new coronavirus variant potentially resistant to current vaccines sent investors dashing for the safety of the Japanese yen and the Swiss franc on Friday, at the expense of the growth-sensitive Australian dollar and Norwegian crown.

Thin overnight volumes due to U.S. Thanksgiving holidays made market moves more volatile as traders dumped long dollar positions and covered shorts in the yen.

Little is known of the new COVID-19 variant, detected in South Africa, Botswana and Hong Kong. But scientists reckon it has an unusual combination of mutations that may make it able to evade immune responses and be more transmissible.

The news sent the South African rand down more than 2% against the dollar to the lowest since last November.

The yen which earlier this week had tumbled to five-year lows against the greenback, jumped 1.3% to a high of 113.6, while the euro fell to near 6-1/2 year lows against the Swiss franc at 1.044 francs per euro.

"This is a textbook flight to quality into yen and the Swiss franc on the new virus strain with the thin liquidity also a factor which may accelerate the unwinding of short bond positions," said Kenneth Broux, a strategist at Societe Generale (OTC:SCGLY) in London.

Speculative accounts had been massively short safe-haven assets, with U.S. CFTC figures showing net bearish positioning at $1.2 billion and $10.3 billion for the yen and Swiss franc respectively in the latest week. Gold, which rose 1% on Friday, had a short position of over $2 billion, the data showed.

"It's not surprising to see the yen being the biggest gainer. First, it's the quintessential safe-haven and second it was very oversold," said ING Bank currency strategist Francesco Pesole. "Short yen positions are now being unwound."

He added the euro, as another low-yielding currency, was less exposed than cyclical peers such as the Australian dollar, while positioning data showed the single currency too had been oversold.

Britain cancelled flights to several countries, noting the new variant was considered by scientists to be the most significant one yet found.

Sterling slipped to a new 2021 low below $1.33.

Oil's price slide took the Norwegian crown down 1.2% to the lowest since last August and against the euro it fell almost 1.5%.

Gains for the yen, franc and euro pushed the dollar index =USD - which measures the greenback against those and three other currencies - further away from Wednesday's 96.938, its highest in nearly 17 months. It last traded at 96.45, down 0.3%.

"One potential threat is that hawkish central banks think this variant threatens (policy) tightening plans. From that perspective the dollar may be a bit more vulnerable than the euro as we are already talking of Fed rate hikes next year," Pesole added.

Markets had priced in one rate hike from the European Central Bank at the end of 2022 but expectations had built for three possible increases from the Federal Reserve next year.

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