News & analysis

GBP

Sterling trades higher against the dollar and euro this morning, although the move is relatively contained considering the March budget is released later today – roughly around 12:30 GMT. Late last night, media outlets broke the news that Chancellor Sunak will extend the Coronavirus Job Retention Scheme this afternoon, with the extension in all pandemic induced relief programmes likely to cost more than £20bn. The CJRS, also known as the furlough scheme, will be extended in its entirety until the end of June, at which point the UK economy is expected to have fully reopened as per the government’s roadmap. Beyond that, the furlough scheme will remain in play, but will require employers to pay incrementally increasing amounts to the employee that is on furlough, thus forcing the business to make the decision to retain or let go of the furloughed worker over time. The £20-a-week increase to universal credits is also set to be extended until the end of September, while self employed benefits will receive a fourth and fifth round. However, attached to the spending pledges will be a commitment to pay off the fiscal shortfall, which the FT states will be outlined in an accompanying bill. We don’t anticipate a fiscal anchor to be dropped until the Autumn budget, at which point the state of the economic recovery will be clearer, but Chancellor Sunak is likely to set the foundations for the upcoming consolidation efforts in today’s speech. Ultimately, sterling may reap the rewards from another fiscal boost, but traders will be keeping a keen eye on how Gilts react to the overall package with respect to new issuance.

EUR

The euro was dragged along broader dollar dynamics throughout yesterday’s session, causing EURUSD to fall below key levels not seen in a month. Overnight, the swathe of dollar strength faded, allowing the pair to recover above two-day highs. ECB policymaker Fabio Panetta joined the rest of the central bank yesterday in responding to the recent advance in global bond yields with some concerns. He discussed the steepening in the nominal GDP-weighted yield curve is unwelcome and must be resisted. If the contagion from rising US yields into the euro area yield curve remains unaddressed, this would lead to a tightening of financing conditions according to Panetta. Actions speak louder than words, however, and if all the commentary from the ECB is not backed up by an increase in the weekly pace of bond-buying, the ECB sends a message to markets it will not do all it can to keep borrowing costs low, which may be dangerous in the recovery phase. Last week’s data showed a slowdown in the emergency bond-buying pace, however the central bank stated this was because of redemptions. This morning’s data calendar included a modest expansion in Spanish services and composite PMIs while Italian PMIs rose more significantly, with services increasing from 45.7 to 48.8. The euro hardly reacted to the data releases. Despite the increase in PMIs, they still remain below the 50-threshold, the data remains stagnant overall and the economy is too fluid. Thematics, central bank commentary and vaccine development therefore tend to have a larger impact on euro price action until economies reopen and markets can gauge which economies are leading the recovery.

USD

Yesterday’s US dollar strength ran out of steam overnight, with the dollar remaining stable this morning after comments from the FOMC’s Lael Brainard who stated she has been paying close attention to the recent moves in US Treasury yields. Previously, the FOMC sounded less concerned about the rising yields and stated they are increasing due to higher growth expectations, which would be positive for the US economy. The shift in tone highlighted by Lael Brainard brings the FOMC’s focus more in line with the ECB’s commentary and may paint a picture of what Fed Chair Jerome Powell will discuss in his speech tomorrow. For now, economists focus on February’s US ISM Services. The median of forecasts submitted to Bloomberg sees a modest correction from the January reading, which may be of help to keep the US dollar stabilised.

CAD

After trading on the back foot in the early part of yesterday’s session, largely due to a strong dollar and US equity futures pointing to the main indices opening in the red, the loonie turned around its fate and closed a tenth of a percentage point higher against the dollar. While US equities traded in the green during parts of yesterday’s session, the loonie’s source of strength came from better than expected December data and a broadly softer dollar. Data yesterday suggested Canada’s economy contracted by 5.4% in 2020, after the 0.1% MoM expansion in December. While the annualized Q4 print was better than expected, coming in at 9.6% vs expectations of 7.3%, the loonie also enjoyed Stats Canada’s preliminary January reading of 0.5% MoM growth. The December and January figures show the Canadian economy withstood the pressure of tighter lockdown measures over the winter better than it did in Spring. The GDP readings are expected to improve given parts of Quebec and Ontario’s economies began to reopen in February. In oil markets, WTI trades just shy of the $60 mark on the eve of the OPEC+ meeting. The cartel is expected to outline plans to scale back previous production cuts, with a 1.5m barrel a day increase up for debate on Thursday. A survey of 105 energy market experts carried out by Bloomberg saw a consensus of a 500,000 barrel a day increase in April. That is the total collective output hike that is up for discussion in April. However, survey respondents didn’t necessarily see Saudi Arabia reverse its decision to cut 1m barrels a day, which was implemented back in February and March. Should only 500,000 barrels a day be brought back online, WTI may soon find itself back above the $60 level, providing a minor tailwind for the loonie.

 

 

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