News & Analysis

This week, markets were consumed with pricing in the level and timing of additional US fiscal stimulus as the prospect of Biden’s $1.9trn Covid-relief package seems unlikely to pass in its entirety. Proposals such as doubling the minimum wage to $15 per hour, aid for states, and higher unemployment benefits will likely result in Republican disapproval, rendering the initial relief package much smaller than the headline figure.

For example, Citi estimates the final bill at around $500-750bn, with Goldman Sachs placing the total package at around $1.1trn. While expectations of fiscal stimulus have been driving the US dollar and the US Treasury curve, the Federal Reserve didn’t want to be left out from the party. Discussions around tapering the current QE programme from $120bn a month were rife after notable comments from Fed members Kaplan and Bostic, but later on in the week Governor Powell poured cold water on the topic stating “now is not the right time to be talking about [the] exit”. Meanwhile, political drama has been unfolding in Italy after Matteo Renzi, leader of the centrist party Italia Viva, withdrew the party’s support of the coalition government as three ministers resigned from their post. As Prime Minister Conte rummages around to find support from other parties, the possibility of a snap election in Italy has resulted in Bund-BTP spreads to widen.

Political events in Europe and Washington will continue to draw market focus next week too, along with the deluge of central bank meetings.

Over the weekend, Germany’s leading CDU party is set to announce Angela Merkel’s successor, with President elect Joe Biden’s inauguration scheduled for Wednesday. Meanwhile, concerns over a snap election in Italy will persist, especially given the rise in popularity of far-right parties in the polls.



Monday – 18/01

The week begins with GDP data from China for Q4 at 02:00 GMT. The data is expected to show GDP post its fastest expansion in two years as China’s economic recovery roads on. The median expectation is that Q4 growth will print at 6.2% YoY, resulting in China’s 2020 GDP growth printing above officials’ expectations at 2.1% YoY. Japan industrial production follows at 04:30 GMT, with markets expecting a marginally softer print in November. Production has nearly returned to its 2019 levels after a 26% slump in May, while the pace of the recovery has gradually slowed down to a flat rate from its July peak on a MoM basis. Although the industrial sector has remained broadly resilient to the Covid situation, the imposition of the emergency state in eleven prefectures and a late start of vaccinations may put some breaks to industrial activity in the subsequent months.

Tuesday – 19/01

Germany’s ZEW Survey Expectations and Current Situation index are on the agenda for Tuesday at 10:00 GMT. The median of forecasts submitted to Bloomberg broadly reflects the view markets seem to be taking on risk sentiment recently. That is: although the current situation has been worsening significantly, the medium-term expectations remain unchanged as the rollout of the vaccines should aid a gradual reopening of the economies in the next quarters and economic conditions should kickstart a recovery over the summer. The expectations index is set to remain unchanged at 55.0 this month, while the current situation index is expected to have fallen from -66.5 in December to -69.0 in January.

Wednesday – 20/01

UK CPI data is expected at 07:00 GMT, with consensus seeing the headline rate rise from 0.3% to 0.5%. With demand pull inflationary forces weak and recovery in the pound in Q4 expected to weigh on inflation, headline CPI isn’t expected to become a concern for FX markets until the second half of the year when tax breaks fall out of the year-on-year window and demand conditions improve. The focus on CPI remains with South Africa’s inflation data for December due out at 08:00 GMT. The headline rate is expected to fall marginally from 3.2% to 3.1% yoY, which would see the headline rate print at 3.3% for 2020 – just above the SARB’s lower bound. At 15:00 GMT, the Bank of Canada publishes its rate decision after several parts of Canada have reinforced new lockdown measures since the last policy meeting. At 21:00 GMT, the Central Bank of Brazil (BCB) is set to leave the selic rate unchanged at 2.00%. Separate notes on both central bank decisions are included below.

Thursday – 21/01

Thursday’s agenda is jam packed with central bank policy decisions, starting off with the Norges Bank at 09:00 GMT and the Central Bank of Turkey at 11:00 GMT. For the CBRT, this meeting is where things will likely start to become slightly more nuanced. After having aggressively hiked rates to by a total of 675 bps over the last three months, the key rate has been well above inflation for the last couple of months, indicating that the shift to positive real rates is here to stay. The task for the CBRT now is to keep living up to market expectations on the benchmark rate, to make sure the lira can continue its recovery. With markets expecting no interest rate hike for this meeting, according to the median of forecasts submitted to Bloomberg, keeping rates unchanged should not lead to a huge lira sell-off – something that has been a risk factor in earlier meetings. Meanwhile, an additional but slight rate hike is likely to be favourably looked upon by FX markets. The European Central Bank follows at 12:45 GMT, and the day ends with the decisions of the Bank of Japan and South Africa Reserve Bank, timings to be announced. Previews of the other central bank meetings are below.

Friday – 22/01

The last trading day of the week starts with fresh Purchasing Managers’ Index figures from several eurozone countries in January, all scheduled for release between 08:15 and 10:00 GMT. The manufacturing sector is set to have performed slightly worse in France, Germany and the eurozone as a whole, while the services and composite reading are expected to have mildly increased in January. The composite figure in France is set to rise above the 50-level threshold for the first time since August, as lockdown measures in France have been gradually eased over the last month, despite the latest tightening in curfew times.  The focus then shifts to the UK, with retail sales data for December due at 07:00 and PMI data for January at 09:30 GMT. Retail sales are expected to rise by 0.6% month-on-month, largely due to seasonal purchasing and the reopening of the sector in early December. However, the rebound remains muted and the details are likely to show more purchases online than in stores given the imposition of tier 4 measures in much of the UK prior to Christmas. Later on, the PMIs are likely to show the effects of the national lockdown measures implemented earlier in the month, with the service sector expected to take most of the hit. However, risks are tilted to the upside relative to expectations of a 45.5 reading in the services PMI after November’s GDP data showed a much more resilient service sector under national lockdown measures.


Bank of Canada preview

Rates on hold as GDP forecasts rise despite tightening containment measures

After tweaking both its QE programme and policy statement in the last two meetings of 2020, we believe the Bank of Canada will maintain its current stance at next week’s meeting despite the latest lockdown measures imposed. Back in October, the Governing Council opted to reduce the pace of its QE programme from C$5bn a week to C$4bn, but the recalibration was delivered in a dovish manner to markets. Governor Macklem argued the more targeted purchases would maintain the level of economic support while the reduction in the pace of purchases provides the programme with more longevity.

In December’s meeting, the Bank tweaked its policy statement to mention that it will “keep interest rates low across the yield curve”.

Effectively, both announcements have been dovish twists by the BoC, but with little wiggle room left before they are constrained by the zero lower bound, we believe the Governing Council will adopt a wait and see approach before any additional action is taken despite the deterioration in the near-term outlook. Meanwhile, an upgrade to its GDP forecasts will provide enough reasoning for Governor Macklem to stave off questions about the Bank’s lack of action in response to the latest economic headwinds.

Back in October, the BoC conditioned its economic forecasts on two assumptions. Firstly, extensive lockdown measures, such as widespread closures imposed early on in the pandemic, will be replaced by more localised and moderate containment measures – which are expected to ebb and flow. Secondly, vaccines and effective treatments are set to be widely available by mid-2022, at which point the direct effects of the pandemic on economic activity (i.e. lockdown measures) will have ended. While measures announced in Ontario and Quebec are arguably more aggressive than the Bank’s assumptions, the downside risks to the forecasts are likely to be temporary. Additionally, the downside impacts will be offset by other upward surprises. Firstly, growth in Q4 likely outstripped the Bank’s judgement of 0.2% QoQ (1.0% annualised). This means the short-term headwinds the economic recovery currently faces will be offset to some degree by better than expected Q4 growth, resulting in the path of the economic recovery staying close to the October projection in the near-term. On top of this, the earlier rollout of effective vaccines in Canada and other major economies will pose upside risks to the medium-term October forecasts. While the distribution of vaccines has been sluggish to date, the government maintains its view that the vaccination programme will conclude by September this year. This is far earlier than the mid-2022 assumption back in October. On top of all of the above, additional fiscal stimulus in the US and effective vaccination programmes in other key economies means the global economic backdrop over the coming years could prove more conducive to Canada’s economic recovery than previously anticipated. This is evidenced in the rise in the price of oil since October, which will now see the BoC base its input of WTI and Brent crude at $50 as opposed to $40.

Given the upward revisions to the medium-term growth outlook, we expect the Bank of Canada will find some difficulty in relaying the rationale for additional “minuscule” rate cuts that have been floated in the press of late. That isn’t to say future 10bps rate cuts won’t be forthcoming in subsequent meetings, as overnight index swaps currently suggest given the level of uncertainty over the economic recovery, but the Bank of Canada will need to see a more substantial deterioration in economic conditions before being forced into more action. In lieu of any policy change, questions posed to Governor Macklem are likely to centre on the bear steepening of the Canadian yield curve despite December’s commitment to keep interest rates low “across the curve”.



The change in the Bank of Canada’s balance sheet provides no suggestion that further monetary support will be incoming at next week’s meeting


Central Bank of Brazil preview

Markets focus on any tweak to forward guidance, readying bets to a stronger real

The Brazilian Central Bank is set to hold rates in the January 20th  meeting, as no additional data will justify a policy move as of early 2021. However, pressures for earlier policy normalisation are building up in Brazil as inflation expectations rise towards the short-term targets. Crucially, the BCB´s next steps are tied-up to the fiscal outlook, meaning any signal of expansionary fiscal policy will turn on the green light for BCB tightening. In the December meeting, the BCB held the Selic rate at the 2% minimum level for a fourth straight month, while introducing a hawkish note to its forward guidance.

From the initial pledge of keeping interest rates unchanged for the foreseeable future, the Bank tweaked its language towards a less data-dependent guidance:

“… over the coming months, the 2021 calendar-year should become less relevant than the 2022 calendar-year, for which projections and expected inflation are around the target. A scenario of inflation expectations converging to the target suggests that the conditions for maintaining the forward guidance may soon no longer apply, which does not mechanically imply interest rate increases, since economic conditions still prescribe an extraordinarily strong monetary stimulus”.

A point of note in BCB’s statement is that the removal of the forward guidance not necessarily means an automatic rate hike, a message duly stressed by the BCB in post-meeting minutes. Economists surveyed by the central bank forecast the start of the tightening cycle in August to end the year at 3%, while market-based expectations point at a 3-month horizon for the initial hike. In our view, the BCB will start policy normalization around Q2 as inflation pressures continue to build-up and vaccines are progressively rolled out. Services activity continues to expand at a solid pace driven by sizeable gains in household consumption and transportation, which should continue. Moreover, hiking rates conditional on the fiscal outlook adds upside risks to this outlook, implying a swifter action by the Central Bank. On the downside, however, the new more contagious strain of the virus recently found in the country puts a lid on price growth, while the looming currency appreciation leaves some space to keep borrowing costs at a record low. Even in a slightly protracted scenario, Brazil seems ready to pioneer the path to policy normalization compared to other relevant EM economies, adding some appeal to the BRL in the median-run.


Norges Bank preview

NB to hold for now while NOK appreciation is in focus on Friday at 09:00 GMT

The Norges Bank decided to leave its main interest rate unchanged at 0.0% from April through to December 2020, but the central bank’s hawkish comments from the previous policy meetings have raised market expectations for a potential rate hike. Governor Oystein Olsen is the first central bank governor in the G10 to hint about potential rate hikes. Despite the Bank’s core message stating that the sharp downturn in the economy and uncertainty around the outlook suggests keeping the rate on hold “until there are clear signs that economic conditions are normalising”, the central bank communicated in the December meeting it sees a gradual rate increase from 1H of 2022. This is sooner than previously forecasted by the Norges Bank and compares to the Federal Reserve, who stated it would only start thinking about normalising policy if maximum employment has been reached, inflation has jumped to 2% and inflation is on target to print above 2% for some time, signalling a much more dovish tone than the Norges Bank.


Medium term market implied policy rate edges higher since previous meeting following hawkish commentary

Since the last NB meeting, the Norwegian economy received a boost from higher oil prices, with Brent soaring to over $56 a barrel and West Texas Intermediate (WTI) reaching levels above $53 a barrel only recently. The resulting appreciation in the krone is exactly what markets will turn their attention to at next week’s policy meeting. It is obvious that the higher oil prices are the main driver of the NOK appreciation, but if the currency appreciates beyond what the jump in crude oil suggests, this may invite jawboning from the central bank at next week’s meeting. For now, oil prices have risen over 13% while NOK has only surged around 2% against the euro and a little over 1% against the dollar, suggesting that the NOK rally isn’t too disconnected from current market pricing elsewhere.

Another development since the previous NB meeting is that virus numbers globally have accelerated, adding downside risks to the very short term global growth outlook.

Considering crude oil prices managed to keep up despite the resurgence in case count goes to show that markets are looking beyond the short term risks of the increase in case count, and are focusing on the vaccine rollout and recovery phase instead. Norway’s domestic outbreak is also at peak levels, but following this rationale, the krone has managed to remain firm as oil markets offer support. Additionally, lockdown measures in Norway remain substantially looser than elsewhere in Europe. Next week’s meeting will likely hold no surprises until the vaccine rollout is at further stages and both the global and domestic outlook deal with fewer uncertainties than the current state. However, as previously stated, the recent levels at which both NOK and Brent crude trades is likely to draw the Norges Bank’s attention.


European Central Bank preview

Front-load PEPP may be on the car

The European Central Bank is set to stand pat on Thursday at 12:45 GMT despite the recent risks to its economic projections due to the deteriorating virus situation and recently tightened/ extended lockdown measures throughout the eurozone.

ECB President Christine Lagarde should provide an update on the euro area economic outlook at the press conference, while expecting to receive questions on the current accuracy of the December projections. Since the December meeting, the largest eurozone economies tightened lockdown measures further and extended them well into Q1 as the third wave is putting increasing pressure on healthcare services. On Wednesday, Lagarde stated the latest projections are still “very clearly plausible”, despite numerous banks having downgraded their eurozone forecasts this month in response to the latest Covid-19 conditions. The ECB’s December projections consider a base case scenario in which lockdowns in Q1 2021 would be no more severe on average than throughout Q4 2020, however, just a couple days after these projections were published, the virus data deteriorated.

A deep contraction in Q1 is now more likely and could raise the need for the ECB to act in order to offset the near-term headwinds to growth. The easiest way for the ECB to do this is by increasing purchases under the Pandemic Emergency Purchase Programme (PEPP).

Increasing the size of the PEPP envelope seems less effective and necessary, as the central bank has only purchased slightly more than €750bn under the scheme of €1.85tn. The PEPP, which has been extended to March 2022 in the last meeting, now consists of €15bn worth of purchases a week. Even if the purchases would be increased to €50bn a week for the entirety of Q1 and then reverted back to 15bn a week, this would not exhaust the PEPP envelope under the current mandate.

The medium-term outlook remains unchanged as the vaccine rollout in the eurozone has kicked off and should facilitate a gradual easing of restrictions in the coming quarters. Ample fiscal support should also help prevent another GDP dip in the medium-term. The ECB won’t publish fresh forecasts until March, but Lagarde may signal next week that downward revisions could be in the cards next week.


South African Reserve Bank preview

SARB to weigh up cutting rates as rise in case count threatens recovery

The recent rise in new cases and positive hit count in South Africa has increased speculation that the South African Reserve Bank will cut rates again next week to offset the headwinds the economic recovery currently faces. The South African economy remains in an adjusted level 3 lockdown, which sees the hospitality sector in South Africa remain open along with schools and places of employment, with a ban on alcohol sales. A tighter curfew has been imposed between the hours of 21:00 and 06:00, with restaurants and bars forced to close at 20:00. While the measures are only slight, the recent rise in the case count likely induced a reduction in voluntary economic activity. Google mobility data for January 10th shows a 36% reduction in retail and recreation visits, down from near 0% in late November, along with a 13% reduction in supermarket and pharmacy visits which was in positive territory as recently as late December.

Google mobility data shows timely effects of tighter restrictions and the reduction in voluntary economic activity

*Baseline activity is the median value for the corresponding day of the week during the five week 3rd Jan – 6th Feb 2020


While the South African rand has depreciated some 3% this year to reflect the recent risks and economic headwinds, down from an earlier peak of -6.6%, the currency trades stronger than it did prior to the November 2020 meeting due to a substantial rally in December. Combined with the recent downside risks to GDP growth brought about by the rise in new cases, forward markets are now pricing in a 14bps reduction in the SARB’s repo rate on Thursday. This reflects around a 56% chance of a 25bps reduction, meaning some fireworks could be forthcoming from the central bank if it decides to ease policy further.


Bank of Japan preview

Worsening Covid situation won’t trigger BoJ policy action, but questions remain for the March meeting

The BoJ introduced some marginally dovish measures in the December policy meeting regarding the size and extension of unconventional easing tools. In particular, the Bank extended the deadline for its coronavirus lending facility from March to September 2021, while lifting the ¥100bn ceiling on the amount each bank can borrow from it. The facility is far from exhausting the total ¥120trn cap on outstanding loans, so no revisions were introduced in this regard. The Bank also extended the timeframe for corporate bonds and commercial paper purchases until September, while maintaining the ¥7.5tn limit on each program. These moves were largely pre-empted by market participants, hence the impact on financial markets and the yen was fairly muted. With little else left in the BoJ´s toolbox and an ultra-loose policy stance largely priced-in, the sensitivity of the yen to the Bank’s communication is likely to remain low looking forward. On a marginally more surprising note back in December, Governor Kuroda announced an upcoming “assessment for further effective and sustainable monetary easing” at the March meeting, echoing a similar review that introduced the yield curve control back in 2016. While attention on this matter is likely to increase ahead of March’s meeting, we believe only marginal tweaks will be discussed regarding the term structure and composition of the Bank of Japan’s balance sheet.

Source: Straits Times

The revision to the economic outlook will rather be the focus of next week’s meeting as the Covid situation deteriorated drastically over the last month in Japan. The government has recently declared a state of emergency in 11 prefectures covering around 60% of Japan’s economy. Although restrictions are still relatively loose, signs of weak private consumption are building up once again. As a result, the BoJ’s outlook in the near-term could be dampened by slow activity, which could weigh on the currency. However, broad consensus supports the view of a swift economic recovery after the vaccination campaign kicks off in Japan. The beginning of the Pfizer&BioNTech shot rollout is scheduled for late February, with the government aiming at covering medical personnel and the elderly population in two months, after which the general public follows suit.

Under this scenario, most activity should return to normal before the summer, when the Olympics are still expected.

The BoJ is likely to emphasise the downside risks to such scenario, however, as the country lags the immunisation race in the G10 space. Aside from the 120 million doses the country has pre-ordered with Pfizer, the Moderna shot is not expected to gain approval before May and final stage trials of the AstraZeneca vaccine are far from finalised. The Japanese government also faces the second-highest distrust to vaccines among advanced economies, adding to the obstacles to a sharp economic recovery looking ahead.


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



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