The loonie had a rocky time last week as it traded in a 2.25% range against the dollar. Much of the action was left for the last two trading days of the week, when the Canadian dollar touched fresh highs against the greenback, only to then substantially retrace the move soon after. This morning, the loonie is back on the front foot, but trades a far distance from Thursday’s high. Volatility is scheduled for the loonie this week, with the OPEC+ meeting on Thursday holding the potential for a repricing in crude oil, especially if a plan for bringing production back online is outlined. Additionally, tomorrow’s release of December’s GDP data will outline how deep the economic contraction was in 2020 and the effect of the latest lockdown measures. Beyond that, the loonie is at the mercy of broad USD movements, which have been dramatic over the course of the last week.
The dollar started off the month on the back foot as Friday’s decline in Treasury yields continued this morning after last week’s spike. The slowdown in yields may be soothing central bankers’ jitters over rising real rates, although the move may signal more volatility rather than an actual pause in the overall bond market rout. Federal Reserve Chair Jerome Powell is set to speak on Thursday this week after he stated last week it may take more than three years to hike interest rates. So far, the Fed has reiterated its view that inflation expectations rising won’t be negative if it’s due to increased growth expectations. With President Joe Biden’s $1.9tn relief package now having passed the House on Saturday and being up for a Senate vote later this week, the question will be whether Powell and other Fed policymakers will push back against the rise in yields, as many market participants have voiced concerns around the size of the package and the odds of overheating the economy. The House bill includes $1,400 in direct payments to individuals, an extension of federal top-ups to unemployment insurance and $350bn for state and local governments. Additionally, the bill includes a gradual increase of the federal minimum wage from $7.25 an hour to $15 an hour over a five-year period. Last week, the Senate parliamentarian ruled the wage increase cannot be pushed through using budget reconciliation and would need a 60-vote majority instead. While this weighs on chances of the bill being passed through the Senate, the House vote was a significant milestone for the Democrats. Beyond the fiscal stimulus saga, headlines on the vaccine front may weigh on the dollar this week. The FDA authorised Johnson & Johnson’s vaccine in the US, which supports the narrative of a quicker US economic recovery as this speeds up the vaccine roll-out, however markets are likely to take this as a USD negative in the current environment of rising inflation expectations and high yields. Besides the Fed speakers and fiscal package, USD traders are likely to take further cues from Friday’s Nonfarm Payrolls release.
The euro traded softer against G10 peers this morning as Purchasing Managers’ Index figures failed to impress the currency ahead of the European Central Bank’s announcement of purchases under the Pandemic QE programme. The data release comes after several ECB officials voiced concerns around the rising bond yields and their impact on financial conditions in the eurozone. If markets perceive the increase in purchases as insufficient, BTP yields may see another increase, widening the BTP-Bund spread. A larger increase than expected means Italian bond yields may fall. Overall, however, the purchases may not have a large impact on the euro as one week of increased purchases in an ever-changing environment may not provide markets with enough clues on a potential shift in the ECB’s stance. Meanwhile, pressure is mounting on the EU’s vaccine rollout as the US added Johnson & Johnson to its supply arsenal and the EU remains far behind the UK and US. The Johnson & Johnson vaccine is set for EU approval on March 11, which would leave the total vaccine suppliers at four starting from Q2. With more vaccine supply in the pipeline, the euro is likely to see upside momentum once these vaccines are approved, the rollout speed can increase and prospects of economies reopening rise.
After a volatile week last week, sterling has started the Monday morning session on a calmer note. Last week, gyrations in fixed income markets resulted in the pound dropping 1.5% against the dollar on Thursday and Friday, but developments over the weekend have seen GBPUSD trade back on the front foot this morning. Over the weekend, headlines fixated on vaccine developments with 20m of the UK population having now received their first vaccine at a minimum and reports that fiscal stimulus will remain supportive in Wednesday’s budget. While fears of tax hikes being announced have been realised somewhat, Chancellor Sunak has outlined that they won’t be implemented in the near-term when speaking about the increase in Corporation tax. Meanwhile, improving growth forecasts will underscore the need for a less aggressive consolidation effort, which we don’t expect to be announced in its entirety until the Autumn budget. Wednesday’s budget will nonetheless result in another spike in GBP volatility as the Chancellor aims to strike a cautious balance of fiscal conservatism while also supporting the economic recovery. Beyond the extension of the pandemic related programmes, we expect the Chancellor to outline transitional programmes for the labour market and businesses, while also laying the foundations for future fiscal consolidation. The market will be frantically squaring the Chancellor’s budget timeline with that of Boris Johnson’s roadmap to reopening in an attempt to gauge the government’s optimism over reopening the economy.