Early in the fourth quarter, G4 central banks were cautious about scaling back expansionary policies implemented last year to counter adverse effects of the pandemic. However, “transitory inflation” eventually became increasingly persistent and in late December, G4 central banks turned hawkish. The Bank of England (BoE) raised its interest rate, whilst the Federal Reserve (Fed), European Central Bank (ECB) and Bank of Japan (BoJ) signalled that they will significantly scale back pandemic-era economic support. At the same time, medical studies suggested that the new Omicron variant of Covid-19 was milder than previous variants, which helped improve investor risk sentiment during the period.

The currency trends of the previous month reversed in December, and while Carry recovered in December, Value and Trend factors fell.

In Carry, the long in Norwegian krone (NOK) added most to the factor’s performance. As global equity indices closed 2021 near their all-time highs, commodity currencies performed best within the G10 foreign exchange markets, led by the NOK and the Australian dollar (AUD).

In contrast, ARCS Value lost ground this month after a strong November. Short NOK and AUD were the largest detractors while long British pound (GBP) contributed positively. Although Covid-19 cases rose sharply across Europe, the GBP benefitted from the first rate hike by the Bank of England since August 2018 and the British government’s decision not to tighten restrictions further around the holiday period.

In Trend, the short position in the Japanese yen (JPY) was beneficial, but short euro (EUR) and GBP versus the US dollar (USD) did not work out. In contrast to November, the “safe haven” currencies JPY and USD did relatively poorly as evidence emerged that the new Omicron variant caused less severe outcomes than Delta. However, the Swiss franc (CHF) held up well amid signs that the Swiss National Bank has not pushed back against CHF strength.