News & analysis

CAD

After driving to sit near its latest two-year high yesterday morning, the loonie struggled to hold on in the afternoon session and ultimately posted only marginal gains on the day. Yesterday, the focus was firmly on the Bank of Canada who tweaked their monetary policy statement somewhat to commit to flattening the yield curve further as its bond purchases increase in maturity. The development was marginally dovish but comes as no surprise after it recalibrated its QE programme back in October’s meeting to do just that; purchase more longer-dated government bonds. Despite the tweaks to the statement, reference to the strength of the loonie remained, signalling the potential for Governing Council speakers to start jawboning the currency at upcoming events. The economic progress report set to be delivered by Governing Council member Beaudry is one such event, as is Macklem’s speech next week. The headwinds to the loonie’s rally may come back into play, especially as the currency now sits at higher levels than before. Focus will very much be on how the BoC conducts its business externally until the end of the year.

GBP

Sterling returns to trading on the back foot this morning as Boris Johnson’s dinner date with European Commission President Ursula von der Leyen produced nothing new for markets to digest. Both leaders acknowledged that the two sides remain far apart over a menu consisting of scallops and turbot, but it is unlikely that they even made it past the bread course before they realised this. Sterling’s rally yesterday over the prospect of talks breaking the impasse is starting to be unwound this morning as the only result of talks in Brussels being a new deadline set in place for Sunday. The idea of a deadline for negotiations is starting to diminish in gravitas for FX markets now, but nonetheless the pound continues to factor in the prospect of a no-deal exit becoming a reality in the near future. Negotiators have sent their teams back to the negotiating table, likely with fresh mandates such that the remaining hurdles can be cleared, but without substantial backing day from both sides it is unlikely that a deal can be struck in a matter of days. Sterling’s drop of 0.7% against the dollar this morning reflects this, as does the widening in spread between one-week and two-week volatility in options markets. The spread between the implied volatilities has reached its highest point this year, highlighting how markets are still taking the upcoming deadline as a serious source of GBP volatility despite many deadlines being extended in the past.

EUR

The euro is trading just below key levels against the dollar this morning, ahead of a big day. The EU leaders meet today to discuss key issues regarding sustainability initiatives, the Poland-Hungary veto over the bloc’s budget and recovery fund, and anti-terrorism and security plans. Headlines suggested that Hungary and Poland lifted their veto over the stimulus package in exchange for a delay in a sanctioning process that could strip them of access to the recovery fund. A person familiar with the discussions said the leaders will likely approve the compromise today. While euro traders will wait for cues on the recovery fund agreement, markets warm up for the ECB’s new policy toolkit announced at 12:30 GMT. The policy will likely be in the form of an expansion and extension in the Pandemic Emergency Purchase Programme (PEPP). Median expectations for the PEPP envelope are set on a €500bn increase, leaving the total amount at €1.85tn. The PEPP is also likely to be extended until at least the end of 2021. Investors will besides focus on the economic projections which are due for an update and will likely need a revision after the resurgence in virus case count and following containment measures in Q4. Since the last ECB meeting, vaccine optimism has dominated currency markets, but this is unlikely to have had an impact on the central bank’s policy, given that a vaccine roll-out in 2021 was already the base case scenario that the ECB had considered. Downward revisions to Q4 GDP numbers may pressure the euro, while the possibility of ECB President Christine Lagarde jawboning the currency is also not off the table.

USD

The dollar has traded with a mixed tone this week, and saw patches of sporadic strength against some major partners yesterday and overnight. House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin remained optimistic about ongoing talks for a bipartisan fiscal stimulus bill, despite an ongoing deadlock over business liability and state government aid. Data from John Hopkins University showed that deaths from Covid-19 rose above 3000 a day for the first time, while California’s average rate of positive tests reached 8.8%, the highest since spring. 17 states joined Texas in filing a lawsuit challenging the outcome of the US Presidential election at the Supreme Court. Presenting no evidence of fraud, the suit instead argued that Trump won 12 million more votes than 2016, as well as the states of Florida and Ohio. The suit is seeking to prevent members of the Electoral College from the states of Michigan, Georgia, Wisconsin and Pennsylvania from participating in the vote that will formally determine the president on December 13th. Michigan Attorney General Dana Nessel said in a statement that “The motion filed by the Texas attorney general is a publicity stunt, not a serious legal pleading”.  The job openings and labour turnover summary showed job openings rising to 6.65m in October, in an encouraging sign of renewed, or at least stable, appetite for hiring among employers. November’s inflation data will be released today at 13:30 GMT alongside weekly initial jobless claims.

 

 

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