News & Analysis


The loonie enjoyed the improvement in the risk environment yesterday as it rallied 0.68% to sit 1.06% higher on the week. Bank of Canada Deputy Governor Lawrence Schembri’s speech to Restaurants Canada yesterday didn’t add much to the Bank of Canada’s overall message sent out via Wednesday’s policy statement. The only supplementary piece of information provided was that the Bank of Canada will now look at how the rebuilding of the economy impacts overall economic capacity, and in turn the long-term unemployment rate. The Bank’s reference to the labour market throughout its recent communications is notable and adds to the importance of their assessment in April’s monetary policy report. Today, the loonie trades lower along with the rest of the G10 FX space amid a stronger US dollar environment. It is notable, however, that the loonie is better positioned to defend the bout of USD strength stemming from reflationary dynamics in the US Treasury market as higher growth expectations in the US boost the Canadian economic outlook too. Later today, markets will get the reading of February’s Labour Force Survey at 13:30 GMT, with a rise in net employment expected as lockdown conditions were eased last month. The overall employment gain is subject to the survey period, with lockdown conditions easing progressively over the course of the month. Expectations sit at a 75,000 net job gain.


After a week of serenity in fixed income markets, the Presidential approval of the $1.9trn fiscal stimulus package and commitments by President Biden to make all US adults eligible for vaccinations by May 1st sent the US 10-year above the 1.60 handle this morning. The sharp move in the back-end of the US treasury curve was exacerbated by block sales and hedging in options markets and weighed on overall market risk sentiment, prompting a sharp reversal of the recent USD trend as the DXY rises 0.4%. The pain is being predominantly felt in the G10 space as EMFX goes largely unscathed compared to the last time the US yield curve steepened in February.  The coronavirus relief package passed in a narrow 220 to 211 vote, with every Republican voting against the bill and all but one Democrat voting in favour. The package includes a new round of individual checks of $1400 for most Americans, a weekly increase of up to $300 in unemployment benefits, $350bn in aid to state and local governments and tax credits expansions for children. Focus now turns back to the discussion of whether the size of the package will aid the recovery or go beyond that and overheat the economy, and what part the Federal Reserve will play throughout the recovery phase.


Sterling trades in the red along with G10 peers against a stronger dollar this morning after it notched gains in the region of 1.14% over the course of the week until Thursday’s close. This morning saw GDP and trade data for January released at 7am, with the UK economy faring better in the latest national lockdown than many expected. Growth came in at -2.9%, a full 2 percentage points above expectations, with the services industry weathering the storm better than previously. On top of that, construction grew in January as a 1.7% increase in new work offset the 0.4% contraction in maintenance work. With the GDP data came the trade balance, which marked a 40.7% decline in the export of goods to the UK and a 28.8% decline in imports. The overall trade balance data is hard to read into for a number of factors, however. The impacts of Brexit uncertainty meant that much trade was brought forward to Q4 2020, resulting in elevated inventories weighing on overall trade. Meanwhile, the data is also skewed by the imposition of trade restrictions by EU countries due to Covid-19 towards the end of the year. Finally, the UK has also switched the way in which it collects trade data with EU countries, moving from the Intrastat Statistical Survey to customs declarations. These factors not only mean the data itself is mired with quirks, but is also not comparable with previous levels, thus inferences of the Brexit impact on the UK trade balance is hard to draw. In trade related news, customs checks on EU imports have been delayed by six months as up to 30 new processing posts are yet to be fully operational.


Yesterday’s European Central Bank decision took the edge off of the euro temporarily before additional commentary from the central bank and better than expected jobless data from the US improved risk appetite. The ECB pledged to ramp up its Pandemic QE bond-buying speed to put a lid on rising bond yields, but stayed away from communicating exact numbers and continued to leave markets in the dark as to what their exact tolerance towards high yields is. The mere mention of the bond-buying shaved off some of the euro, but this was immediately reversed when ECB President Christine Lagarde discussed the risk outlook as being more balanced than before, allowing EURUSD to reach a 1-week high. This morning, the pair tumbled back near yesterday’s lows. Headlines on several European countries suspending the use of the Oxford-AstraZeneca vaccine may have helped to impede risk sentiment on this side of the Atlantic, although the EU’s medicines regulator stated there is no indication that the vaccine is linked to an increased risk of blood clots – which was the reason for the suspense initially. The halt in the vaccinations adds to the hiccups the EU has already faced since the beginning of the roll-out period, increasing risks to the prospects of reopening. For today, all eyes are on Italian Q4 unemployment data at 09:00 GMT and euro area industrial production from January at 10:00 GMT.



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