News & analysis


The Canadian dollar hit another fresh two and a half year high against the US dollar yesterday as the greenback came under renewed pressure as fiscal stimulus talks continue in vain while US initial claims data painted a bleak picture for the US labour market. The loonie struggled to close at its recent high, which is likely due to the Bank of Canada’s Deputy Governor Paul Beaudry. While giving an economic progress report, Beaudry struck dovish tones which we expected in order to soften the loonie’s rally. The Deputy Governor spoke about the Bank’s assessment of lowering rates further as they investigate whether the effective lower bound is closer to 0% as opposed to the current 0.25% rate. Speaking on the size of QE, Beaudry stated that the Bank could go faster towards the back-end of the yield curve with its purchases but said increasing the quantity of purchases isn’t a direction the BoC would want to go. Finally, with regards to the loonie, the Deputy Governor reiterated what markets already knew; the Bank of Canada is keeping a close eye on the price of the loonie as it is a major input into the Bank’s outlook. Beyond that, however, Beaudry stuck to the Bank’s official lines that CAD appreciation is due to broad USD depreciation and therefore carries less risk to the economic outlook. With Governor Macklem speaking next Tuesday at the Governing Council’s final appearance before the New Year, Beaudry’s comments could just be building the basis for Macklem’s crescendo next week. The stronger the loonie trades, the more likely Macklem will verbally intervene.


Despite several half-hearted rallies that proved short-lived, the dollar is trading lower compared to the start of the week against many major currencies, notably AUD, CHF, and NZD. Progress on a fiscal relief package stalled yesterday, when Republican Senator John Thune expressed doubts that agreement could be reached on the issue of liability protection for employers from suits relating to Covid-19 protections. The Senate also postponed a vote on a stop-gap funding bill to keep the government running past today, although the White House budget office may decide against shutting federal agencies and furloughing workers on a discretionary basis over the weekend if a measure is expected to pass. Monthly inflation data for November passed largely without incident yesterday, with both headline and core inflation rising to 0.2% for the month. Weekly unemployment claims rose sharply to 853,000 last week, further raising the amount of new hiring required to keep overall job creation positive this month. Today at 13:30 GMT, producer price data will be released.


In a tumultuous session yesterday, the euro ripped over half a percentage point higher against the dollar as the ECB meeting met market expectations with a EUR500bn top-up in the Pandemic Emergency Purchase Programme. The PEPP also was extended by 9 months to March 2021, which is 3 months more than what markets had anticipated. On top of that, some adjustments to the longer refinancing operations were made. The TLTRO III was extended by 12-months, while four additional PELTROs and increased access for banks with regards to TLTROs were offered. While markets had largely expected the 500bn additional PEPP and the extension of the programme of 6 months, the additional measures were not priced in by markets, causing the euro to immediately jump on the news.  More importantly however, the ECB’s new projections signal that the central doubt if the economy can be fully reopened by the middle of next year already, as the forecasts assume stronger GDP growth in 2022 compared to 2021. While the ECB took centre stage yesterday, the headline of the EU agreeing on the €1.8tn budget and recovery package did not go unnoticed. Poland and Hungary dropped objections to the new mechanism tying payments to rule of law principles. Germany brokered a compromise which offers reassurances over how the new conditions will be applied, which is what Poland and Hungary demanded in their last request. The rule of law provision will thus remain in place and all EU countries will take part in the deal. This likely gave the euro another boost before broad dollar strength took over this morning, largely reversing yesterday’s price action. For today, the euro is likely to take cues from developments in risk sentiment and speeches by the ECB’s Robert Holzmann at 09:00 GMT and Hernandez de Cos at 15:00 GMT.


Volatility in sterling hasn’t eased despite negotiations carrying on until Sunday. After Prime Minister Johnson warned the UK to prepare for an exit from the EU with an Australian style trade relationship, the pound took another leg lower and now sits over half a percentage point down against both the US dollar and euro. Bank of England Governor Andrew Bailey is also hitting headlines this morning as he highlights the EU’s lack of preparation for a no-deal exit with regards to financial services, while also highlighting that the central bank continues to be in discussion with banks over the application of negative rates. Markets are already jostling with the idea of negative interest rates from the Bank of England. Overnight Index Swaps are already pricing in rates of -0.1% as early as May. With negotiations continuing over the weekend, markets are likely to position themselves for substantial Brexit news today. This would be a repeat of what occurred last Friday in the run-up to the previous deadline where many expected a deal to be struck over the weekend. However, sentiment has deteriorated substantially as both sides continue to reiterate that a no-deal exit is the most likely option now, suggesting that further downside in sterling is to be expected throughout the day.



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