With concerns over the global health backdrop weighing on risk sentiment across markets yesterday, the loonie continued to be offered against the US dollar as markets sought security from the potential slowdown in economic activity. With equities and commodities trading in the red too, the USDCAD pair hit a fresh year-to-date high in yesterday’s session after rising 0.6% on the day. The loonie’s losses were ultimately contained to just 0.4% on the day, however, the currency continues to trade on the back foot despite the improvement in risk sentiment this morning. Today, the release of October’s retail sales data at 13:30 GMT populates a sparse data calendar. While health concerns remain the primary driver, any downwards surprise in today’s data release could send the loonie back towards yesterday’s one-year lows.
The dollar is trading in tight ranges against G10 FX this morning amid a lack of meaningful headline flow, after the week started with a classic risk-off market mood. Reports from late Monday showed that President Joe Biden and Senator Joe Manchin spoke Sunday night on the Build Back Better Act, and kept the door open to further negotiations after Manchin announced earlier in the weekend he no longer supported the legislation passed by the House. The report sparked renewed optimism in markets that Biden’s tax and spending bill has not yet collapsed. Manchin’s support is needed for a 50-50 split in the Senate between Democrats and Republicans. Biden is also expected to address the nation with a speech today on the perils of remaining unvaccinated, but renewed lockdown measures are not expected to be discussed yet.
Favourable valuation and falling US yields helped the single currency in yesterday’s trading session as markets sought refuge from the downturn in the global health backdrop. However, the single currency likely experienced positive benefits from the rise in regional risk as well after the Turkish lira spent most of the day sliding aggressively against both EUR and USD, before a fresh depositors system announced by the government for local savers sent the lira 28.16% higher against the dollar from its daily low. Today, the euro is tracking the broad G10 rally against the greenback, although its pace is much slower than the high beta currencies. Meanwhile, data out today is very limited. Consumer confidence indicators out of the Netherlands and Germany continued to tumble amid tighter lockdown conditions, while the only notable data release for the rest of the day is Italian PPI for November at 10:00 GMT.
Despite the limited data calendar in yesterday’s session, GBP volatility wasn’t limited as rumours of tougher restrictions being implemented following the emergency cabinet meeting put pressure on the pound. As it became clear that further measures won’t be announced, the pound exhibited a brief relief rally and traded flat against the dollar. However, the overall risk-off backdrop resulted in GBPUSD closing the session out lower. Speculation over tighter measures remains as new cases of the Omicron variant continue to print at high levels, although yesterday’s case count of 8,044 is a marked slowdown from Sunday’s 12,133. Despite the precarious health backdrop, the pound is better supported in today’s session as it trades 0.18% higher against the dollar and marginally higher against the euro at the time of writing.
Events in Turkey yesterday had esteemed EM currency traders gobsmacked as the lira went from 12% down on the day against the dollar to rallying over 28% from its trough upon closing. The catalyst behind such a move was the announcement of a new local deposit scheme from President Erdogan, which will see the government replace any lost TRY savings against hard currencies due to exchange rate depreciation. The move is aimed to stem the local demand for foreign currencies as inflation and exchange rate depreciation continues to undermine the purchasing power of TRY deposits amid the lower interest rate environment. While the measures have seemingly worked a treat thus far, questions over the sustainability of such measures and the government’s credibility to pay for lost savings remain a risk to the effectiveness over the medium-term. Given the excessive volatility and the rising sensitivity of policymakers to TRY depreciation, Turkey will capture a bulk of the market attention yet again heading into the Christmas period.