XE Market Analysis: North America - Jan 05, 2021

The dollar has been trading steadily so far today after yesterday rebounding quite sharply from 33-month lows. This has come amid a backdrop of sputtering stock markets, with narratives ascribing today's two runoff elections in Georgia, which has existential implications for the incoming Biden administration (as the result will decide whether Democrats or Republicans will control the Senate), alongside the constant rise in positive Covid tests and associated restrictions, as providing excuse for markets to correct. The DXY dollar index has settled above the trend low seen yesterday at 89.42. EUR-USD has concurrently settled lower, in the mid-to-upper 1.2200s, after yesterday foraying above 1.2300. USD-JPY has settled around 103.0, and the pound ebbed modestly lower as market participants continue to digest the UK-EU deal. The Aussie and Kiwi dollars are showing gains over over 0.5%, but remain below their respective highs from yesterday. The Canadian dollar, meanwhile, recouped some of the ground it lost yesterday during a sharp drop in oil prices. Oil prices steadied today after yesterday seeing a sharp correction after posting 11-month highs, which in our view shouldn't have been too surprising, what with the demand-destruction being caused by the increasing Covid lockdown measures being taken in Europe and other major northern hemisphere nations, alongside increasing supply from both OPEC and non-OPEC producers, and with crude prices having already returned to pre-pandemic levels. Front-month WTI futures lifted back above $48.0 after tumbling by just over 5% from yesterday's high near $50.0. USD-CAD rebounded by over a big figure from the 33-month low the pair saw yesterday, at 1.2663, though has since dropped back around the 1.2740 area. Bitcoin has settled after whippy price action yesterday, and remains over 8% down on its record high.

[EUR, USD]
We remain bullish on EUR-USD into 2021, on the proviso that global asset markets remain in a bull trend, which looks likely amid the mix of fiscal stimulus, prospects for a vaccine-assisted return toward societal and economic normalcy, an anticipated release of pent-up consumer demand in major economies, low interest rates, and so forth. In this scenario, the asymmetry between richly valued U.S. stock markets versus comparatively lower priced markets in Europe and across the emerging world would propel net dollar-weakening capital flows. The Fed's inflation tolerant policy rubric, which should keep U.S. real interest rates on a loosening path, is also a key dollar-negative consideration. The two Georgia run-off elections today (January 5th) presents some market risk, as the outcome will decide whether the Republicans or Democrats will control the Senate. Democrats need to win both to level the Senate at 50-50, with control swinging to the Democrats due to the tiebreaker vote of Vice President-elect Kamala Harris. Polling suggests things are close. For currency markets, a Democratic presidency and a split House is seen as bearish for the dollar, while a Democratic presidency and House is seen as dollar bullish, or at least less dollar bearish, due to greater demand-side stimulus, driven by healthcare and infrastructure spending. With regard to the euro, the common currency has recently been attracting demand as a consequence of the EU's historic EUR 1.8 tln budget-and-recovery package. While not the first time the European Commission has borrowed in capital markets on its own account, it marks a significant upscaling. This, it should be noted, was facilitated by the exit of the UK. Since late October, the EU's has issued several social bonds under the EU SURE instrument (Support to mitigate Unemployment Risks in an Emergency), all of which were massively over-subscribed, reflecting demand from long-term investors like life insurance companies, who have a prevailing need for long-term triple-A bonds to invest in to match their liabilities. In 2021, the European Commission will launch borrowing under the €750 bln NextGenerationEU instrument, which is a pandemic recovery investment finding vehicle aimed at investing in green and digital technologies.

[USD, JPY]
The yen's broader performance should continue to derive from the level of risk appetite in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.

[GBP, USD]
The pound has been trading moderately softer, breaching yesterday's low against the euro and posting a two-week low against the outperforming Aussie dollar. Cable has been trading more neutrally so far today, consolidating losses seen yesterday from 32-month highs just above 1.3700 to the mid 1.3500s. We anticipate that the pair will remain underpinned on the back of a soft dollar, though the pound may concurrently maintain a flat-to-weakening bias against the euro. The UK's terms of trade with the EU have eroded in the post-Brexit world, despite the deal, and the key financial services sector is in a strategically more precarious position than before, with participation in EU markets dependant on the latter's equivalency rules, although London's marked natural advantage in this area should protect the sector over the near- to-medium term. This said, there is potential for pent up business investment, with Brexit uncertainty having finally dissipated, while the UK is ahead of the pack in rolling out a Covid vaccination program (although the UK nations are now under the most restrictive lockdowns since the first lockdown last spring).

[USD, CHF]
EUR-CHF has lifted back above 1.0800, influenced by gains in EUR-USD. Risk-on positioning had been weighing on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to the Covid-19 crisis. The recent weakening of the currency will have been pleasing to policymakers at the SNB, given their chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

[USD, CAD]
The Canadian dollar has traded lower over the last day, concomitantly with lower oil prices. Front-month WTI futures are steady today, near $47.50, after tumbling by just over 5% from yesterday's high near $50.0. USD-CAD rebounded by over a big figure from the 33-month low the pair saw yesterday, at 1.2663, though has since around the 1.2740 area. There are reasons for caution with regard to crude. Oil supply is increasing, demand-sapping Covid lockdowns and restrictions are still ratcheting across Europe and other areas of the northern hemisphere, and the price of crude is already back within pre-pandemic ranges. This could set crude prices up for a sharp correction at some point, perhaps on the trigger of any weekly inventory showing a bigger than expected build in oil stockpiles.