Having had a strong start to the week on Monday and Tuesday, Sterling is paring back its gains this morning as the US dollar and risk appetite in general has had a change in tone. Information about next week’s spending review from Chancellor Rishi Sunak is being released to the media, with the FT reporting this morning that the fiscal update will contain a “scary” outlook for the UK economy. In addition to existing fiscal stimulus measures, the Government has also recently reached an agreement on a £16.5 bn boost to military spending, including plans for a Space Command and funding for the UK’s next-generation fighter jet. The money will be distributed over four years, representing a substantial boost to the Ministry of Defence’s current £41.5 billion budget. This morning’s main release will be industrial order expectations data from the Confederation of British Industry, at 11:00 GMT.
The euro is up against all G10 currencies this morning with the exception of the US dollar, Japanese yen and Swiss franc, indicating a clear risk-off market mood. While the new risk factors are mostly centred outside of the eurozone, with the US dealing with a resurgence in virus case count, EU political risks may still weigh on the euro. EU leaders will hold a video call today to persuade Hungary and Poland to rethink their veto to the stimulus package worth €1.8tn in budget disbursement over seven years and a virus recovery fund. The veto has so far brought headwinds for the Polish zloty and Hungarian forint but downside risks for the euro remain realistic as well. Governments must avoid cliff edges on fiscal aid measures, according to European Central Bank President Christine Lagarde in a hearing at the European Parliament this morning. As long as demand remains weak, continued fiscal support is needed and EU policymakers must continue to help the economy and bridge the gap until a vaccine is well advanced. President Lagarde appears once more at 15:00 GMT today at the Women’s Forum, while ECB members Francois Villeroy de Galhau, Pablo Hernández de Cos and Isabel Schnabel will speak at several conferences between 15:00 and 16:00 GMT.
Markets are currently trading like a broken boiler; you don’t know whether they’re going to run hot or cold until you wake up and check that morning. This is the case with the dollar and G10 FX markets in general as they switch between trading on positive vaccine news leading to a more positive 2021 growth outlook and a deteriorating Covid situation at present. Today, it is very much the latter as more areas within major economies are closed to contain the second waves. New York today will close schools after the infection rate hit 3%, with public transport also curtailed. In France, the latest lockdowns seemed to have helped bring down the number of ICU patients, but Macron’s comments yesterday suggest that the easing of measures won’t be imminent. Meanwhile, Tokyo’s high alert level isn’t expected to trigger lockdown measures, but it may do should the situation deteriorate rapidly. These measures come at a time when parts of Canada and the majority of Europe’s largest nations already sit in strict lockdown conditions. In this new risk-off dynamic, European equities are following the pattern set in the US equity market at the end of its session yesterday. That is, trading in the red. The dollar is well supported in this market still, with DXY trading 0.3% higher today with the greenback trading higher against the G10 as a whole. Markets will likely continue focusing on the outbreak of Covid in major economies when trading the broad US dollar today, especially as the economic calendar is sparse for the US ahead of tomorrow’s preliminary PMI data.
After a brief flurry of optimism on Monday as the number of new Covid-19 cases dipped below 1,000 in Quebec, and the loonie traded higher against the dollar on Tuesday, normal service has resumed. The greenback has begun to rally again as Covid-19 concerns outweigh vaccine optimism, while the number of new cases reported in Ontario and Quebec sits back above 1,000 for Tuesday – Wednesday’s data will be released later today. With the second wave plateauing in Canada’s two largest provinces under tighter lockdown measures, the measures are struggling at present to get the number of new cases to carve a meaningful downtrend. With the second wave also becoming an increasing concern in the US, the loonie is being dragged down with its growth outlook from both sides. The news cycle in Canada today focuses on the near completion of a UK-Canada post-Brexit trade deal, which nears completion according to the UK’s Department for International Trade. The UK is Canada’s third-largest export market, accounting for C$14bn in exports in just the first nine months of this year – a year which has seen reduced trade as well. Last week, Prime Minister Trudeau said the two nations could wrap up negotiations by the January 1st deadline, which would come as a welcome gift to both economies as the economic recoveries start to stall in Q4.