News & analysis


Sterling continues to struggle in this tentative risk environment, with the pound falling over a percentage point since Friday morning. Comments from Foreign Secretary Dominic Raab over the weekend suggested that the government will look to review the current national lockdown measures in March, with the government planning to vaccinate all adults by September. Meanwhile, the government will plan to step up its mass vaccination programme this week as it shuts the borders for any traveller that doesn’t hold a negative PCR test. People over the age of 70 along with those clinically vulnerable will be offered vaccinations as of today. With over 3.8m vaccinations administered thus far, the government gave the green light to begin vaccinating the next at risk groups as it aims to have vaccinated 14m elderly and vulnerable citizens by mid-February. With little scheduled on the data calendar this morning, markets will continue to trade the pound in line with the broad USD move. Currently, sterling trades 0.4% lower against the dollar and euro, which is in line with the moves witnessed in other high beta currencies such as AUD and NOK.


With risk sentiment having taken a hit over the weekend, the euro is trading softer against USD, JPY and CHF while trading in the green against all other G10 currencies over a 1-day window. EURUSD is trading below 1-month lows as the dollar rebounded.d The moves are almost perfectly in line with the dollar spot index changes, indicating that the euro plays less of a factor in the decline of the pair. The currency may still see headwinds this week however if Italy’s Prime Minister Giuseppe Conte fails to gather enough votes to hold onto his outright majority. Conte needs a dozen more votes after the defection of former premier Matteo Renzi’s party. Without an absolute majority, Conte may have to forge a new coalition and negotiate a new programme to remain premier. If that fails, Italy may be up for early elections in June, according to officials. Italian bond yields have spiked higher since Renzi’s departure, largening the BTP-Bund spread, an indicator of risk in the eurozone. Over the weekend, markets got a glimpse of what the post-Merkel world will look like when Germany’s leading party CDU announced Armin Laschet is now the frontrunner to succeed Angela Merkel. The elections were not definitive, however, the CDU and the Christian Social Union (CSU) are due to decide in March who will run as their joint candidate. Laschet may still lose out to CSU’s Markus Söder who has gained much popularity over the last years as well. Lastly, Dutch Prime Minister Mark Rutte resigned on Friday due to a scandal over childcare subsidies which had driven thousands of families to financial ruin. Rutte will remain in place as a caretaker administration until the national elections in March, but until then won’t be able to carry out any new stimulus plans. For today, markets will focus on the EU Finance Ministers meeting on the recovery package.


The latest rebound in the dollar continues in this morning’s session despite the US observing a federal holiday today to remember Martin Luther King Jr. Elevated case counts in major economies and the near-term economic headwinds have kept market risk sentiment tentative over the last few weeks, resulting in the DXY index rising from lows of 89.2 to current levels of 90.8. This marks a substantial retracement in December’s risk-on rally as it is unclear what the path out of lockdown looks like for European nations and Canada at present, especially with vaccine distribution being jolted by the Pfizer delay. When combined with expectations of increased fiscal stimulus in the US, markets are beginning to favour the US economy as a general asset, at least until relaxed measures are signalled in other major economies. The Japanese yen stands as the sole currency in the G10 to rally against the dollar in this environment, highlighting the classic risk-off trade on Covid-19 concerns, while even Asian FX markets are struggling to trade higher despite China’s strong fourth quarter GDP figures out earlier this morning. Nothing is scheduled in the US economic data calendar today, but tomorrow’s session sees Janet Yellen, former Fed Chair and likely incoming US Treasury Secretary, testify to the Senate Finance Committee ahead of Joe Biden’s inauguration on Wednesday. Yellen is expected to reiterate her view on markets determining the value of the dollar ahead of Senate voting whether to confirm her as Treasury Secretary. According to the Wall Street Journal, prepared remarks from the Former Fed Chair will include the comment “the value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy”.


The loonie continues to be mired by the breakdown in risk sentiment in markets as it trades nearly half a percentage point lower against the US dollar this morning. On Friday, it is rumoured that Prime Minister Justin Trudeau formally instructed Finance Minister Chrystia Freeland to re-establish a firm budgetary target after the Covid-19 crisis has passed, avoiding any additional permanent spending post-pandemic. Trudeau’s suggestion that Canada should maintain its fiscal advantage and drop the fiscal anchor in the coming year adds to speculation that the Prime Minister could be pivoting towards driving the Canadian electorate to the polls. Previously, the government’s aggressive fiscal stimulus plans have drawn some criticism from the opposing Conservative party as they showed no signs of slowing down or committing to consolidation over the coming years. Over the weekend, news focused on the possibility of President-elect Biden cancelling the Keystone XL permit via executive action on his first day in office following a report by CBC. The news cycle has suggested that Biden will aim to unwind many of Trump’s controversial policies within his first 10 days in office, with the CBC report based upon the words “rescind Keystone XL pipeline permit” on Biden’s transition briefing note for January 20th – inauguration day. While the focus for Canada’s oil market will be on Biden’s first few days in office for this reason, it may not distract from the Bank of Canada meeting on Wednesday as markets speculate on a mini rate cut by the central bank. While economists expect the benchmark rate to stay at 0.25%, overnight index swaps are pricing in a 70bps cut on Wednesday’s meeting, raising speculation that a mini 10bps cut could be on the cards – a premature expectation in our view.



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