News & analysis

This week has been an interesting one for FX markets as the overall appetite for risk was determined by equity markets and vaccine headlines. While GameStop and Wall Street Bets grabbed the attention in financial media as hedge funds fought against the angry mob of retail investors, equity markets globally determined the level of support the US dollar found.

This resulted in FX markets trading each day in specific blocks as it looked to equity market opens in different time zones to gauge the level of risk appetite throughout the course of the day. This all occurred during a period when overall confidence in economic outlooks remained tentative as supply issues with vaccines sat in the limelight. Meanwhile, the Federal Reserve meeting on Wednesday went without a blip as no fireworks went off due to Chair Powell steering clear of discussing the Fed’s outlook on QE tapering.

Next week, the focus remains on central banks with the Bank of England, Reserve Bank of Australia and National Bank of Poland due to release fresh policy decisions. Meanwhile, focus will remain on the distribution of vaccines globally as key providers struggle with supply constraints.

Calendar

Monday – 01/02

China’s Caixin manufacturing PMI for January kickstarts the economic calendar at 01:45 GMT, with a slight slowdown in activity expected. Median expectations sit at 52.6 compared with December’s reading of 53.0, but China’s manufacturing sector is expected to be propped up by robust export conditions.

German retail sales figures are next up at 07:00 GMT. While extended lockdown measures have generally hurt domestic activity and consumer sentiment, retail sales have held strong in Germany. The consensus of a 2.0% decline in November was offset by a surprise 1.9% print in the actual reading, marking the first back-to-back gains since the pandemic. While the recovery may have to wait until vaccine levels are at more developed stages, retail sales are expected to remain strong throughout. December’s month-on-month figures are set to show a -2.0% change, but risks are tilted to the upside considering the retail sector’s resilience.

Sweden’s Q4 GDP follows at 08:30 GMT and is set to show a moderate increase from Q3. Sweden’s government drastically changed its containment approach throughout the second wave after loose restrictions in response to the first wave left the nation with a high Covid mortality rate. While the hit to GDP was limited during the first wave compared with European peers, this reading will undoubtedly show the impact of tighter containment measures. The median of forecasts submitted to Bloomberg foresees a 1.0% QoQ increase in GDP – a stark decline from Q3’s 4.3% rise – but risks remain tilted to the downside.

Between 08:45 and 08:55 GMT, markets turn their focus to manufacturing Purchasing Managers’ Index figures from Italy, France and Germany. While Italy’s figures will come as new information for markets, Germany and France’s manufacturing PMIs are final readings and aren’t expected to deviate from the previous readings of 57.0 and 51.5 respectively. Italy’s reading is expected to moderate from December’s 52.8 by 0.3 points.

Canada manufacturing PMI for January is then released at 14:30 GMT, sticking with the deluge of manufacturing sector PMIs on Monday. Canada’s manufacturing sector has withstood the impacts of cold weather and tighter lockdown measures thus far, with December’s reading sitting at 57.9.

Tuesday – 02/02

The Reserve Bank of Australia is set to keep interest rates on hold at 0.1% at 03:30 GMT, but upwards revisions to their growth and inflation projections are likely. A strong recovery in the labour market, as evidenced in December’s 50,000 increase in employment, will give the central bank confidence in upgrading its macro forecasts.

Meanwhile, hawkish undertones are likely to be centred on the rise in house prices of late.

Preliminary Q4 GDP data for the eurozone is on the agenda at 10:00 GMT. Data from the eurozone’s largest economies was released earlier this week and showed better than expected figures from France, Germany and Spain. France’s GDP slump in Q4 printed at -1.3%, while Germany and Spain even printed positive figures at 0.1% and 0.4% respectively. The difference comes from the severity of the lockdown measures in that period: France experienced stricter lockdown restrictions in Q4 than Germany and Spain. On balance, the figures may leave markets more confident around the eurozone-wide release next week.

Wednesday – 03/02

Following Tuesday’s monetary policy decision, RBA Governor Philip Lowe will hold a speech at 01:30 GMT. China’s Caixin PMI for services and composite follow at 05:00 GMT. The non-manufacturing sectors have had greater challenges as the winter may have led to a larger scale-back in construction than the previous year. Additionally, China stepped up virus containment measures, imposing localised lockdowns and advising to reduce social gatherings around the Lunar New Year. Given these downside risks and the fragile state of domestic demand conditions already, the services and composite PMI readings are expected to moderate. Expectations are only supplied for the services index and sit at 55.5, down from December’s reading of 56.3.

Turkish CPI figures will be released at 07:00 GMT. In the CBRT’s latest inflation report, the central bank held its forecasts unchanged. Accordingly, inflation is projected to be at 9.4% at the end of 2021 and fall to 7% at the end of 2022 after Q4 2020 showed consumer inflation stood at 14.6%. The CBRT acknowledged the temporary nature of the higher inflation figures due to developments in food prices and exchange rate effects.

With the lira having recovered almost 10% since December’s lows and having stabilised since then, inflation figures are likely to fall throughout the next few months.

However, as the pass-through is lagged somewhat, January is likely to still see high inflationary pressures, although the central bank clearly signalled it is willing to keep policy accommodative to lower inflation to more sustainable levels. January’s YoY CPI is set to print at 14.70%, according to Bloomberg’s consensus. Services and composite PMIs from the eurozone follow between 08:15 and 09:00 GMT and are set to remain depressed, although the majority of the figures will be final readings and should not be too different from the preliminary prints. The National Bank of Poland is then up and we expect them to keep monetary policy unchanged, but markets will need to warm up for the expected jawboning of the currency and threats of FX intervention and rate cuts. A separate primer is included below.

Thursday – 04/02

Thursday morning will begin with the theme of eurozone data again, with German construction PMIs scheduled at 08:30 GMT followed by eurozone retail sales at 10:00 GMT. Retail sales held strong throughout the pandemic as shown in Germany’s case, and this week’s German retail sales will also be used as an indicator for eurozone retail sales as a whole by markets. The Bank of England is then up at 12:00 GMT where we expect comments around the viability of negative interest rates to dominate FX markets focus. However, we don’t see the BoE committing to or embarking on negative interest rates as early as Thursday’s meeting, with marginally dovish tweaks likely to take the form of looser TFSME criteria – more on this below.

Friday – 05/02

German factory orders are set to come in at 07:00 GMT. Factory orders have stayed in positive territory since May 2020, but this time around Bloomberg economists expect a 1.3% decrease on a month-on-month basis due to tougher lockdown measures in December that have left their mark on factory orders. Risks are tilted to the upside however, with retail sales and GDP figures remaining strong in Germany as well. The week is then rounded off with the Canadian Labour Force Survey and US NonFarm payroll data released for January at 13:30 GMT. Canada’s labour market shed jobs last month for the first time since April, posting a 52,700 net employment reduction. Tougher lockdown measures are weighing on the labour market recovery, and with supplies of vaccines remaining at depressed levels, a negative surprise in the employment data could see the loonie sell-off. Meanwhile, NonFarm payroll data is expected to show employment rise by 50,000, however, the same was expected for December’s release which printed at -140,000 in the end. The deterioration in the US labour market will be pressing, especially given the hype around additional fiscal stimulus at the moment. It could be a case of bad news is good news with the data release if it prints with a negative sign as it may force Republican senators to show greater support to Biden’s $1.9trn proposal, which includes direct cheques for those most vulnerable in the labour market.

 

NBP preview

Dovish NBP will keep its wings closed at Wednesday’s policy meeting

The National Bank of Poland has been on the markets’ radar since it last intervened in the EURPLN cross back in December. The NBP’s focus has remained on the strength of the zloty since, with recent comments from chairman Adam Glapiński outlining the scope for further rate cuts if needed. The dovish comments follow those by other monetary policy committee members who emphasised the benefits of a weak zloty, but also stated rates would be appropriate at the current level until the economy enters a sustainable recovery. Glapiński himself added that Poland has a large scope for more monetary easing, but hoped it would not be needed. “A further rate cut is possible in the first quarter of the [next] year” is what he mentioned during the December meeting, causing markets to price in a rate cut around March, as the NBP communicated they are running analysis on the potential situations and consequences of such a cut. For now, a rate cut is unlikely until vaccine distribution progresses further, providing clarity on the outlook for the economic recovery, or EURPLN tests the NBP’s resolve again.
In terms of virus developments, the second wave in Poland appears to have peaked and case growth is stabilising now, while the positive test rate has fallen as well. With the ratio of vaccinated people remaining relatively low (1 shot/100 people vs 2 shots/100 people in the EU), the risk of a third wave remains high in Poland. These are very short term risks however, as Poland is due to have received almost 6 million doses by the end of March (4.6mn Pfizer, 0.8mn Moderna, 0.4mn CureVac). This would be sufficient for 3 million people with two doses per person – around 8% of the population.

With such uncertainty around the economic outlook as Poland awaits the supply of additional vaccinations, the NBP is likely to hold fire on cutting rates in order to preserve its ammunition should downside risks materialise.

While we don’t see the NBP cutting rates at Wednesday’s meeting, the previous NBP press statement contained an explicit reference to further currency intervention. With markets knowing that the NBP sold the zloty around the 4.45 levels vs the euro in December, this may invoke a level of support in EURPLN around that region. With the current exchange rate holding above 4.5 for the past three weeks, an announcement of FX intervention is unlikely at this meeting, however, we expect monetary policy members to jawbone the currency regardless. The central bank will still focus on reducing the possibility of currency appreciation as this will allow for a fast recovery as soon as the economy reopens while a weak zloty would also largen the impact of the NBP’s bond purchases.

 

BoE preview

Negative rates off the table for now, with TFSME adjustments preferred

Since the December 17th meeting, the Bank of England has witnessed the implementation of a free trade agreement between the EU and UK, positive developments in the form of vaccine distribution, and the imposition of new national lockdown measures across the UK. Considering an FTA with the EU already underscored the BoE’s forecasts back in November, developments since the December meeting have posed downside risks in the short-run. This begs the question of what further easing measures the Bank is going to roll out in response to the prolonged national lockdown measures that are in place across the UK. This is especially the case considering the BoE has responded to the realisation of downside risks by loosening policy in its last two meetings. In November, the implementation of a one-month national lockdown resulted in the BoE expanding its QE programme for the third time since the pandemic, by £150bn. While in December, tighter tiered measures in the run-up to Christmas saw the Bank of England extend its Term Funding Scheme for SMEs (TFSME) from the end of April to the end of October. Given the additional downside risks to the economic outlook since December’s meeting, we believe the BoE will further expand the parameters of its TFSME programme at February’s meeting, while giving markets insight into the viability of negative rates within the UK financial system. However, considering the current economic outlook and the Bank’s previous assessment that negative rates are most effective during cyclical upswings, we don’t foresee the MPC implementing or even signalling negative rates in the near-term at next week’s meeting – this is outlined in our latest GBP outlook. We also don’t expect the MPC to adapt its QE programme as over £100bn still remains within the current confines.

Expect a sharper downturn in the Q1 GDP projection but vaccine optimism to offset hit to overall 2021 GDP forecast.

Source: Bank of England November MPR

Not only will markets get an insight into the latest policy decision at next week’s Bank of England meeting, but a fresh set of projections are to be released. Developments since November’s MPR have been negative in the short-run, which are likely to result in the Bank’s near-term GDP projection showing a more pronounced contraction in 20Q4 and 21Q1, but vaccine optimism is likely to keep 2021 Q4 forecast stable at around 11%.  While we expect the Bank to downgrade its short-term outlook on the economy, the extent to which they will do this is questionable. November’s GDP data evidenced how the economy is better adjusted to lockdown measures relative to Spring 2020, with the reading coming a full two percentage points above market expectations. If the Bank assumes this adjustment remains in place for December and Q1, February’s MPR could see only minor revisions to the MPC’s near-term projections, which is likely to be the deciding factor on where policy goes given current conditions. In addition to this, the rapid rollout of vaccines suggests further confidence that the economic contraction in 2021 will be centered on Q1, as our expectation for lockdown measures loosening in March remains intact despite the target for schools reopening moving back from February 22nd to March 8th. These offsetting factors over the course of the year reinforce our view that more drastic monetary policy measures won’t be implemented at next Thursday’s meeting.

 

No changes to the QE expected but TFSME conditions set to be loosened as pass-through incomplete

Markets have come to terms with the Bank of England’s QE programme being their marginal policy tool, after the Bank has opted to increase their stock of purchases twice since March’s initial £200bn announcement. However, with over £100bn left in the tank before the post-pandemic purchases hit the £450bn limit, we don’t see the Bank adjusting the overall stock of purchases at Thursday’s meeting as there remains flexibility within the current confines. Additionally, the Bank of England, like most other DM central banks, view their QE programme as a means of providing liquidity in bond markets in order to maintain market functionality. With Gilt markets functioning just fine at present, any adjustment to their overall stock of assets would mark a shift in the Bank’s view on QE towards the inflation outlook. Instead, the Bank could use the level of flexibility within the current framework to increase the rate of purchases from £4.4bn currently, offsetting this with a slower rate of purchases in the latter stages of the recovery. This would be a marginally dovish turn by the Bank of England and the likeliest option if it chooses to adjust policy beyond the TFSME programme. However, we only place a 30% probability on this occurring at Thursday’s meeting.

BoE have over £100bn remaining under current QE scheme

Instead, the Bank is likely to adjust the terms of the Term Funding Scheme for SMEs. The TFSME programme was first introduced in March 2020, aimed at improving the transmission of the BoE’s rate cuts to the real economy. At a time when banks’ deposit rates are already low and cannot be reduced further, low interest rates may struggle to filter through into lower lending rates to the real economy. Acknowledging this, the Bank rolled out the TFSME programme, a variant of the Term Funding Scheme introduced in 2016, which provides four-year funding of at least 10% of participants’ stock of real economy lending (as measured at the end of 2019) at interest rates at, or very close to, the Bank rate of 0.1%. While gilt yields and corporate lending rates have fallen significantly since the BoE’s rate cuts and the implementation of the TFSME programme, Goldman Sachs analysts have found limited pass-through in mortgage rates, especially in high loan-to-value mortgages. This shows an incomplete transmission of monetary policy to the real economy, namely households. When combined with the latest BoE Credit Conditions Survey that suggests corporate lending spreads are expected to widen in Q1, the impact of the TFSME programme begins to look less effective.

Uncertainty around the economic outlook and an expected rise in insolvencies as government support schemes are removed, thrusts the TFSME programme into the limelight for Thursday’s meeting. While a reduction in the preferential rate is unlikely without a cut in the Bank rate, which we don’t see being signalled until at least the end of 2021 if at all, the Bank may look to loosen the criteria around the programme to increase the effectiveness of its previous monetary policy efforts. Considering the programme has already been extended in December’s meeting, additional tweaks are likely to come in the form of extending the 4-year term on transactions and increasing the 10% borrowing allowance.

For FX markets, the focus will remain over the Bank’s assessment of negative interest rates within the UK financial system, and the response in money markets to the assessment. However, marginal tweaks to continue supporting the real economy should not be overlooked, as it highlights the BoE’s tolerance to the current economic headwinds.

Uneven and uncertain vaccine distribution is unsettling for markets

While markets cherished the early discovery of Covid vaccines at the end of last year, their uneven distribution across the world through January has sparked uncertainty over the ability to tackle the pandemic on a global scale. The notorious dispute between the European Union and AstraZeneca on delayed delivery of vaccines to the euro area has thrust these concerns back into the market’s focus. Countries like Israel, the UK and the US keep the lead in the immunisation campaign, whereas the eurozone and Canada struggle to receive contracted doses on time. Hard hit economies like Brazil, Mexico and India are far from speeding up their vaccine rollout, whereas other advanced economies like Japan haven´t even started vaccinating yet. Risks of uneven vaccination plans across the world are not isolated on a national scale. Without an orderly immunisation across jurisdictions, the prospects of a cohesive easing in lockdown measures continue to be trimmed in the near-term.

From the 7 vaccines available at the moment, more than 110 contracts comprising 8.49 billion doses have been pre-arranged already, according to the Bloomberg vaccine tracker. To date, 86.4 million doses have been administered in 60 countries. None of the vaccines on its own offers enough capacity to inoculate the 7.8 billion global population, but the combined effort is the best chance to put the pandemic to rest. Top infectious-disease officials have said that herd immunity could be achieved by vaccinating 70%-85% of the global population. At the current average pace of 4.19 million doses administered daily, it would take years to achieve a significant level of global immunity. However, the daily rate has been increasing steadily, while soon-to-be approved vaccines and additional manufacturers should help to speed up the race.

Daily vaccinations around the world have climbed consistently over time

While advanced economies have secured most of the pre-arranged doses so far, differences over their delivery agenda have put additional pressure on already stressed governments. The European Union in particular tightened export rules on Covid vaccines, while warning on effectively seizing control of vaccine production from local manufacturers if deliveries weren´t made on time. Should other countries follow through to secure domestic access to vaccines, a major escalation in the immunisation agenda is at risk. In addition to this, scientists haven’t still ruled out the possibility of the disease spreading from those vaccinated. Moreover, data has shown some vaccines are less effective in fighting new strains of Covid-19, as seems to be the case with the mutation found in South Africa regarding the Novavax vaccine. Overall, this means that delayed prospects for economic reopening in most countries remain high risk.

As the situation stands now, rapid progress has been made in the UK and the US among major economies. With 8.31 vaccinated per 100 people to date, the US is conducting state rollout of the Pfizer and Moderna vaccines at a warp speed, with at least 6.8% of the population having received one of the two-doses medicine and 1,4%, the complete cycle. Pfizer said that 200 million more doses would be delivered two months in advance by end of May. In the UK, where over 100 thousand covid-related deaths have been registered, 11.1% of the population has already received the first shot and 0.7% have been administered both, with 355,173 doses being applied on a daily average. In the EU, in contrast, only 2.46 people out of 100 have received at least one shot already, reporting a remarkably slower pace in vaccine distribution. The disclosed agreement by the AstraZeneca pharmaceutical with the EU, its largest provider so far, indicates the planned delivery of 400 million doses throughout the year. Only 17 million will be delivered in February as suggested by the company. German Health Minister said this week that shortages on vaccines will span well into April, calling for European coordination to get alternative plans pushed forward.

Uneven distribution of vaccines poses challenges to the fight against the global pandemic.

In other hard-hit countries, the situation is even worst and plans for massive reopening are far from clear. In Brazil, only 0.67 per 100 people have been inoculated, with deliveries from Pfizer and local manufacturing by Butantan and Fiocruz labs indicating delays. Other challenges abound as in the northern state of Manaus, where more than 76% of the population have been diagnosed with the virus but herd immunity hasn’t been achieved. In Mexico, which just surpassed India as the third-most deadly country by Covid, a meagre volume of 0.5% of the population has received the shot to date, while the speed of infections continues to rise. India has an atypical, yet concerning, situation. Even when the country has secured enough doses to roll out one of the biggest vaccination campaigns in the world, the country has a shortage of people willing to take them. As of late January, only about 56% of eligible people stepped forward to get the shot, rendering it nearly impossible to target ¼ of the population by July, as initially planned. Little progress registered in most developing countries paints a challenging picture going forward.

 

Authors: 
Simon Harvey, Senior FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst

 

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