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XE Market Analysis: Asia - Jan 19, 2021

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The Dollar plied a narrow range overall in N.Y. on Tuesday, leaving the DXY between 90.40 and 90.58. There was no data to drive the USD, and some consolidation appeared to be settling in ahead of the inauguration on Wednesday. Ongoing talk of massive fiscal stimulus under the Democrats supported Wall Street, which posted decent gains. Deficit spending to fund the stimulus supported Treasury yields, as did nascent inflation concerns. Treasury Secretary nominee Yellen stressed the need to go "big" on stimulus, as indicated in her prepared remarks. She also indicated the U.S. is not looking to weaken the dollar for a competitive advantage. Much of this was priced in and there was little directional impacts on the dollar and the markets.

[EUR, USD]
EUR-USD was range bound between 1.2145 highs seen early in the session, and 1.2116 lows into the London close. The USD had been on the rise since the final outcome of the U.S. election, as massive fiscal spending, firmer rates, and inflation concerns heat up. For Europe, widespread Covid lockdowns have potential to send economies back into recession. The ECB's board meets on monetary policy this week, though after tweaks to the PEPP and TLTRO programs in December, the Bank is unlikely to further top up the existing policy. Markets will watch for comments on the euro and the future of the inflation target amid the ECB's ongoing strategic policy review. For EUR-USD, perhaps a period of consolidation is due, until it becomes clearer how the stimulus negotiations play out.

[USD, JPY]
USD-JPY has for the most part remained inside of its 20- and 50-day moving averages (currently 103.62 and 103.95, respectively) for a week now. The pairing rallied from 103.65 to 104.08 overnight, since idling on either side of 104.00 since then. Firmer Treasury yields, which have ramped up since the confirmation of an all-Democrat controlled U.S. government will likely continue to provide some support, while the Yen may remain under pressure as Covid cases grow quickly in Japan, leaving many hospitals at or near capacity. About half of Japan's population is under some sort of lockdown order, and there have been reports that Japanese officials are pushing for the entire country to go on lockdown for at least a month. This would weigh heavily on any prospects for economic recovery anytime soon.

[GBP, USD]
Cable was range bound in N.Y. on Tuesday, though firmer from overnight lows, trading between 1.3604 and 1.3628. The post Brexit situation is one of adjustment, with trade with the EU now entailing form-filling and other hurdles, and the process hasn't gone entirely smoothly, but the adjustment process will continue and there are also expectations that pent up business investment will be unleashed, with Brexit uncertainty having finally cleared. There have been reports of long-term investor interest in UK assets over the last, which have been left undervalued by the impact of both the long Brexit process and Covid lockdowns. The UK data calendar this week is highlighted by December inflation data (Wednesday), along with December retail sales and the preliminary December PMI manufacturing and services surveys (Friday).

[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. The pairing remained under the 1.0800 mark through Tuesday's session.

[USD, CAD]
USD-CAD retreated from seven session highs of 1.2800 seen on Monday, to 1.2719 in London morning trade. The pairing has since idled between 1.2745 and 1.2720. Relatively firm oil prices, along with a risk-on backdrop this morning supported the CAD, as did general USD weakness. USD-CAD support is now at the 1.2700 level, with resistance up at 1.2759, which represents the 20-day moving average. The BoC meets on Wednesday, and its policy announcement is expected to reveal no changes to its current rate setting at 0.25%. Extraordinary forward guidance will likely remain in place -- the bank previously reiterated that it expects to hold rates at the effective lower bound until "economic slack is absorbed so that the 2% inflation target is sustainably achieved."

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