XE Market Analysis: Europe - Jan 13, 2021

The dollar has declined for a second day, further giving back the rebound gains that were seen in the wake of the Georgia runoff elections in the U.S., and despite tomorrow's detailing by president-elect Biden of the Democrat party's economic stimulus plan. The dollar softened following remarks by Fed hawks Mester and George, yesterday, who pushed back on speculation that the central bank might taper its asset purchase program during 2021. U.S. CPI data for December, released later today, is also expected to reaffirm the relatively high level of inflation compared to peers, albeit at only an expected 1.3% y/y rate (up from 1.2% in November) in the headline reading. The data will in turn reaffirm the negative U.S. real interest rate differential versus Japan and the Eurozone, among other economies. The DXY dollar index fell to a new low for the week, at 89.94, extending the drop from the three-week high that was seen on Monday at 90.73. EUR-USD lifted above Tuesday's high to a peak at 1.2223, though remained shy of Monday's high. USD-JPY declined to a six-day low at 103.53. Cable touched the 1.3700 level, which is just 5 pips from the 32-month peak that was seen on the first day of 2021 trading. At the same time, EUR-GBP tested the 12-day low that was seen yesterday at 0.8919. The pound yesterday rallied after both the BoE Governor Bailey and Deputy Governor Broadbent sounded cool on negative interest rates. The rapidly proceeding Covid vaccination program in the UK, which is on track to have nearly 25% of the population vaccinated including nearly all of the at-risk groups by mid February, has also been in the market's conscience, as indeed it is in minds of BoE policymakers. Elsewhere, AUD-USD edged out a five-day high, and NZD-USD a two-day peak. USD-CAD whittled out a two-day low at 1.2701. The Canadian dollar and other oil correlating currencies lifted in sync with the rally in oil prices, the latest phase of which was fuelled by weekly U.S. crude inventory data from API, released yesterday, which showed a 5.821 mln barrel depletion in stocks, much bigger than the market consensus for a 2.266 mln barrel draw. Crude prices were already buoyant heading into the API data release, thanks to Saudi Arabia's announcement last week for a 1 mln barrel a day production cut in both February and March. Front-month WTI oil futures earlier hit a new 11-month high at $53.93. There remain reasons for caution with regard to oil's upside potential, given demand-sapping Covid restrictions across the northern hemisphere, and with tanker-tracking data showing compliance among OPEC+ producers to maintain output quotas falling to 75% in December.

[EUR, USD]
EUR-USD lifted above Tuesday's high to a peak at 1.2223, though remained shy of Monday's high. The gains have reflected broader dollar softness, which further gave back rebound gains that were seen in the wake of the Georgia runoff elections in the U.S., and despite tomorrow's detailing by president-elect Biden of the Democrat party's economic stimulus plan. Remarks by Fed hawks Mester and George, yesterday, who pushed back on speculation that the central bank might taper its asset purchase program during 2021, weighed on the greenback. U.S. CPI data for December, released later today, is also expected to reaffirm the relatively high level of inflation compared to peers, albeit at only an expected 1.3% y/y rate (up from 1.2% in November) in the headline reading. The data will in turn reaffirm the negative U.S. real interest rate differential versus Japan and the Eurozone, among other economies. While we retain a bullish view of EUR-USD, the prospect of a Biden presidency with Democrat control of the House and Senate has presented a countervailing force, given the consequential raising in expectations for fiscal spending, and thereby for growth and inflation, which may force the Fed to taper asset purchases sooner than would have been the case if Congress had been split. The dollar bearish thesis is hinged on the view that U.S. assets are richly priced relative to global assets, which are likely to attract greater investment flows in the global reflation trade, which in turn is hinged on Covid vaccination programs proving effective around the world.

[USD, JPY]
USD-JPY declined to a six-day low at 103.53 amid renewed dollar weakness. Remarks by Fed hawks, who pushed back on speculation for a tapering in asset purchases during the year, have knocked Treasury yields lower. U.S. CPI data for December, released later today, is also expected to reaffirm the relatively high level of inflation compared to peers, albeit at only an expected 1.3% y/y rate (up from 1.2% in November) in the headline reading. The data will in turn reaffirm the negative U.S. real interest rate differential versus Japan and the Eurozone, among other economies.

[GBP, USD]
Cable touched the 1.3700 level, which is just 5 pips from the 32-month peak that was seen on the first day of 2021 trading. At the same time, EUR-GBP tested the 12-day low that was seen yesterday at 0.8919. The pound yesterday rallied after both the BoE Governor Bailey and Deputy Governor Broadbent sounded cool on negative interest rates. The rapidly proceeding Covid vaccination program in the UK, which is on track to have nearly 25% of the population vaccinated including nearly all of the at-risk groups by mid February, has also been in the market's conscience, as indeed it is in minds of BoE policymakers. The Covid vaccination rollout is providing investors a 'bridge' over prevailing lockdown realities, with UK nations last week going into a 'tier 5' lockdown, the most restrictive level since the full 'mother lockdown' of spring last year, and with talk of a yet more restrictive 'tier 6' being introduced. Regarding the Covid situation in the UK, testing is ramping higher under the government's 'Operation Moonshot', which aims to, and is nearing to, have capacity to for same-day mass testing of a large portion of the population. Positive tests results have been soaring concomitantly with rising testing. Deaths have also been rising, though the lockdown-sceptic camp have been highlighting that the proportion of all-cause mortalities being badged as a Covid death is rising while the actual level of total deaths remains -- conspicuously -- within seasonal norms, which is in marked contrast to the experience of the first wave. A similar pattern can also be observed in other parts of the world where Covid had a large impact in the first wave, including in nations and places were there has been limited restrictions (such as Sweden and in Indian slums). The sceptic camp argue that this is being caused by a flawed diagnostic regime, which is wholly dependent on testing (itself unprecedented), and in particular by the PCR method and the specific testing protocols being used, which is prone to kick up false positives once the virus has become endemic in a population.

[USD, CHF]
The recent weakening in the Swiss fran 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]
USD-CAD whittled out a two-day low at 1.2701. The Canadian dollar and other oil correlating currencies lifted in sync with the rally in oil prices, the latest phase of which was fuelled by weekly U.S. crude inventory data from API, released yesterday, which showed a 5.821 mln barrel depletion in stocks, much bigger than the market consensus for a 2.266 mln barrel draw. Crude prices were already buoyant heading into the API data release, thanks to Saudi Arabia's announcement last week for a 1 mln barrel a day production cut in both February and March. Front-month WTI oil futures earlier hit a new 11-month high at $53.93. There remain reasons for caution with regard to oil's upside potential, given demand-sapping Covid restrictions across the northern hemisphere, and with tanker-tracking data showing compliance among OPEC+ producers to maintain output quotas falling to 75% in December.