News & analysis


The loonie held on for much of yesterday’s session as the Canadian 10-year yield climbed along with its US counterpart. The loonie’s reluctance to cave to the dollar dynamic came at a time when oil markets were feeling the pressure of a stronger dollar too and traded in the red. However, upon open, US equity markets finally placed too much pressure on the loonie, which ultimately succumbed to the pressure to post losses of 0.73%. Today, the Canadian 10-year has played catch up as it now trades inline with the US 10-year, while front-end yields sit higher on expectations of the Bank of Canada normalising policy earlier than the Fed. Movements in Canadian bonds this morning are supplying the loonie with enough ammunition to fend off the stronger dollar today as USDCAD trades flat in the early parts of the European session.


FX markets yesterday were put into a tailspin by rising DM yields, led by the sell-off in the US 10-year treasury that pushed its yield up to 1.5% at the close of play. While back-end yields were climbing in the morning of the European session, with limited implications for G10 FX as the dollar remained soft, the US open saw equities trade under substantial pressure as yields continued to climb. The combination of rising yields and an equity sell-off soured overall risk sentiment and kicked the dollar back into life. Against the G10, the US dollar reigned supreme, with only CHF and EUR posting gains against the greenback. High beta currencies like AUD and NOK sustained over a percentage point in losses, while GBP and CAD followed closely behind. The story was a lot bleaker against the EM basket. Traditional high-yielding currencies like ZAR, BRL and MXN were put under the pump, with the South African rand leading losses with a 3.6% drop on the day. Weakness in the Brazilian real prompted intervention from the BCB, which sold $1.535bn in two spot auctions to try and stem the slide in its currency. This morning, FX markets are striking a much calmer tone as the rout in bond markets stabilises somewhat. The dollar continues to trade stronger in the G10 space on the whole, with only CAD, CHF and JPY posting gains, while EM currencies that sustained the largest losses yesterday are retracing parts of their moves this morning. However, with most of the FX volatility stemming from US markets yesterday, the equity cash open this afternoon may trigger another swathe of volatility as it combines with month-end rebalancing too.


The euro stood idly by as yesterday’s US bond rout spread across European sovereign debt instruments, causing key eurozone bond yields like the French 10-year to yield positive for the first time since June. The bond rout was based upon expectations of a faster recovery, leading to higher inflation and higher rates, with many institutional investors left on the wrong side of the move and scrambling to cover positions. Over the past 24 hours, several European Central Bank policymakers commented on the increase in yields, with Isabel Schnabel stating the ECB may need to increase stimulus if the rising yields hurt growth and that the central bank still has room to cut rates further. However, she also stated that an increase in nominal yields, which reflects an increase in inflation expectations, is a welcome sign as long as real long-term rates remain more stable. Her comments follow after ECB Chief Economist Philip Lane told Spain’s Expansion platform it can be problematic if market optimism moves ahead of the current state of the economy. The ECB will therefore carefully monitor the rise in yields with many anticipating the central bank to change its stance on PEPP at the March meeting. On the growth side, it is too soon to say if the central bank’s macroeconomic forecasts will be altered to account for the change in yield curves. With an eye on President Joe Biden’s proposed $1.9tn stimulus plan, the sell-off in US bonds may yet again spill over into European markets, potentially placing upward pressure on EURUSD like it did yesterday in the months to come. For today, euro investors will continue to take cues from developments in European bond markets while also keeping a close eye on the G20 press conference which continues today.


Sterling fell 0.9% against a resurgent US dollar yesterday and continues to slide this morning. Sterling’s decline was exacerbated against the euro, however, as the single currency weathered the bond sell-off better. Similar dynamics continue this morning, despite a relatively calm session in bond markets. Sterling remains under the pump against the dollar, with GBPEUR downside remaining the path of least resistance today. Data today is limited for the pound, with investors keeping a close eye on what news reports say will be included in next week’s budget. Therefore, for the time being, sterling remains at the mercy of broader market dynamics. Whether this includes another turbulent session in fixed income markets is yet to be seen.



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