News & analysis


Yesterday’s risk-off move sent the loonie tumbling 0.68% against the dollar, despite the Bank of Canada’s business outlook survey highlighting that business sentiment rebounded to above average levels in the final quarter of 2020. Business managers reported stronger sales outlooks, investment and hiring plans, along with tightening labour markets, but simultaneously about a third of businesses stated they continue to struggle, highlighting the uneven nature of the recovery. Additionally, the results of the Bloomberg Nanos survey saw 52% of respondents see rising home prices over the next six months – the highest level since polling began in 2008. With Canadian households sitting on an elevated level of liquidity, rising housing prices and the reopening of the economy could create a substantial windfall of consumer demand which will help push the recovery path towards a steeper trajectory. Despite these data points, however, USDCAD traded off of the USD move exhibited across the board. Today, the focus is the same as the loonie trades a quarter of a percentage point higher while little is scheduled in the way of data.


After the dollar’s bounceback in yesterday’s session, it trades this morning marginally lower and paves the way for a calmer morning in European markets. The continued bear steepening in the US yield curve yesterday was likely the driver of the bounceback in the USD, along with continued fears of prolonged economic damage in Europe due to harsher lockdown measures. The US 10-year yield now sits around 1.15%, while the spread between the 2-year and 10-year is near 100bps; a level not seen since mid-2017. Markets have arguably priced in the latest economic risks posed by the lockdown measures in Europe and Japan and the incoming level of stimulus from the Biden administration. However, volatility in the bond market may continue for some time as recent FOMC members speak out on the likelihood of bond tapering by the Federal Reserve as early as this year. Both Atlanta Fed President Raphael Bostic, who is set to be a voting member this year in one of the four rotating FOMC slows, and Dallas Fed leader Robert Kaplan stated that if the recovery continues at such a pace, the Fed may reduce its $120bn a month bond buying regime. While this isn’t a view held across the board, as Richmond Fed Thomas Barkin refused to answer questions on the matter when he appeared on CNBC, speculation will remain rife. With the number of US vaccinations rising by a record 1.25m yesterday, however, the impetus is there for the Fed’s outcome based forward guidance on QE to be reached by year-end under the current trajectory. Meanwhile, in Washington, Donald Trump and Mike Pence have agreed to work together for the remainder of their term in the Oval office, meaning that VP Pence is unlikely to trigger the 25th amendment to remove Trump from office. The chamber votes today on a motion to urge Pence to reconsider, but if rejected by at least one member or the motion is declined by the Vice President, an impeachment vote would be scheduled for tomorrow. Incoming Senate Majority Leader Chuck Schumer is examining whether the Senate can hold an emergency session for a trial.


With risk sentiment retracing and the safe haven currencies paring back gains, the euro is trading softer against the majority of the G10 this morning while rallying vs safe havens USD, CHF and JPY amid a lack of idiosyncratic drivers. These drivers may return tomorrow and Thursday when European President Christine Lagarde participates in a Q&A and the ECB will publish its meeting account. The euro may also take cues from intensified Italian political risk in the next few days as one junior partner in Italy’s ruling coalition is threatening to quit, just as the country is battered by the resurgence of the pandemic. Former Prime Minister Matteo Renzi’s party, Italy Alive, may pull two ministers today, which would threaten to bring down Premier Giuseppe Conte’s government. The BTP-Bund spread is currently at its lowest in five years but this may be up for a change should political risk in Italy creep back, adding downside risks for the euro.  Delays in the vaccination process may be another headwind to the euro as Brussels is fending off criticism that it bought too few doses of the vaccine. Chief negotiator for the EU central vaccine procurement scheme Sandra Gallina appears before the European parliament’s environment committee today to discuss whether the supply of jabs has been sufficiently ambitious. For comparison, the US has spent more than $12bn on pre-financing vaccine companies’ manufacturing capacity while the EU – with a larger population – spent roughly €2bn. Gallina will face questions from MEPs on the environment committee on this today, while Dutch Prime Minister Mark Rutte holds a press conference in the evening where he is set to announce a three week lockdown extension.


Sterling was mired with the broad USD move yesterday as market risk sentiment retraced substantially. Adding to concerns, Boris Johnson took to the wires to reiterate the possibility of tighter lockdown measures in the UK, largely due to a lack of adherence to the current stay at home measures. Johnson stated “if we feel that things are not being properly observed, then we may have to do more”, just after the Prime Minister came under fire as the Evening Standard reported he was seen cycling 7 miles from Westminster to Stratford. Meanwhile, comments from Bank of England member Silvana Tenreyro regarding negative interest rates went largely unnoticed by markets yesterday. The comments made at an online seminar at the University of West England largely reiterated those made in the Bank of England’s August monetary policy report. However, Tenreyro cast a relatively optimistic assessment of the option to go into negative territory, reiterating the Bank’s need to react to the latest economic shock. It is widely regarded that the Bank will dip into negative rates to counteract the effects of the latest lockdown measures, but with the rate cut being optimal when banks capital ratios are healthy, markets aren’t pricing in a move by the BoE until the back end of the year. Even then, a full cut to -0.1% isn’t priced in, meaning the BoE has scope to stimulate the economy in the interim with more explicit forward guidance on negative rates.



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