XE Market Analysis: Asia - Jan 07, 2021

The Dollar rallied for the second day on Thursday, though the bulk of gains came ahead of the N.Y. open. Higher Treasury yields, and prospects for stronger U.S. growth in the coming months due to what will likely be ramped up spending by Democrats now that they are in charge, have driven the USD up since Wednesday. The DXY printed six-session highs of 89.97 in morning trade, up from early Asian lows of 89.35. Treasuries appear to be raising the red flag on the inflation outlook, while continuation of massive deficit funded stimulus at some point will have the opposite impact on the Dollar. The current brief rally may not have legs over the longer term. Incoming data saw weekly jobless claims improve overall, while the November trade deficit widened more than expected, but the December services ISM beat expectations. Friday brings the key December BLS employment report.

[EUR, USD]
EUR-USD bottomed at four-session lows of 1.2245 into the N.Y. open, down from post-close highs of 1.2344. The pairing has since gyrated between 1.2283 and 1.2246 through the N.Y. session. For now, the prospects for strong economic growth later in the year, partly the result of what is expected to be huge stimulus spending from the Democrats, and partly from hopes the pandemic can be tamed with the rollout of vaccines, should support the USD for a time. With inflation concerns growing, and with U.S. defects spiraling out of control however, Dollar gains will ultimately be unwound.

[USD, JPY]
USD-JPY has run up to better than three-week highs of 103.96, up from 103.52 after the one, and overnight lows of 102.96. Broad Dollar strength has been the main driver, as markets look ahead to big spending from the controlling Democrats to buoy the U.S. economy going forward. Equity markets remain on fire, which last month likely would have seen the safe-haven Greenback head lower. Now, with vaccines rolling out, and potential for big economic growth later this year, the USD may, for now, maintain some buoyancy.

[GBP, USD]
Cable dropped to six-session lows of 1.3539 after the London close, down from the Asian peak of 1.3633. The spike in U.S. Treasury yields following the unexpected Democrat wins in the Georgia runoff elections has thrown a spanner in the works of the dollar weakening theme. The Fed will keep rates capped, and at some point the FX market will start wondering how much U.S. deficit spending is too much, and the USD may suffer accordingly. This said, UK nations are back in the tightest level of Covid restrictions since the last spring's 'mother of lockdowns', though the UK government is aiming to have nearly 25% of the population vaccinated as soon as mid next month, including all of the most at-risk groups.

[USD, CHF]
The SNB maintained policy settings in December and reaffirmed once again that it will use direct intervention on currency markets to keep a lid on the "highly valued" currency, despite the fact that the U.S. now official labels Switzerland as currency manipulator. There was no real surprise in the statement, with the central bank highlighting that Covid-19 is "continuing to have a strong adverse effect on the economy". The bank expects consumer prices to fall sharply this year and to stay around zero over the next two years, also thanks to a strong CHF. To start the year, EUR-CHF pulled back under the 1.0800 level, which had provided good support for much of December. A positive risk backdrop saw the cross trade to 1.0863 highs in the Thursday session.

[USD, CAD]
USD-CAD climbed to 1.2734 highs in London morning trade, advancing from post-Wednesday close lows under 1.2665. General USD strength was the driver, as USD-CAD rallied despite WTI crude hitting fresh 10-month highs. The DXY was able to print a six-session peak. The wider U.S. trade deficit along with the slightly narrower Canadian shortfall had little impact. The FX market narrative has begun to shift, as prospects for massive U.S. stimulus are seen a U.S. growth drivers. Higher interest rates have supported as well. For now, the Greenback may hold its own, at least until inflation, and huge deficits are more fully priced into the USD.