News & analysis


Loonie price action yesterday had to deal with multiple conflicting developments. In the late part of the European session, news that OPEC+ would not increase production through April sent WTI $4 per barrel higher, aiding petro-currencies such as CAD, while Jerome Powell sparked another leg higher in US yields, resulting in a broadly stronger dollar. The developments meant that the loonie reversed early gains brought about by the higher oil price, with USDCAD closing the session out marginally higher. This morning, the loonie is trading flat against the dollar as the reflationary trade continues in markets. However, with the loonie having a strong correlation with the S&P 500, its fortunes may turn upon the cash open in US equity markets should higher yields lead to another day of equity market losses. For now, the higher oil price is shielding the loonie from the broad USD bounce.


The dollar shot up with US yields yesterday after a session that was relatively benign until the late afternoon. Fed Chair Jerome Powell’s comments in a Q&A session with the Wall Street Journal struck another dovish message, sending the signal to fixed income markets to trade back-end yields higher in order to test the Fed’s resolve and prompt a response. The sudden spike in yields placed pressure on US equity markets again, which closed out the day in the red, and resulted in the US dollar taking another leg higher against G10 currencies. While some members, including Lael Brainard, have expressed concern recently over the developments in bond markets, Powell’s commitment to be “patient” in withdrawing support for the recovery and his laissez-faire attitude towards bond market developments have stoked the fire underneath fixed income traders’ feet. With the Federal Reserve now entering a blackout period ahead of the March 17th policy decision, small developments in data, fiscal policy or vaccine distribution could lead to an extension in the US bond market sell-off, leading to an increasingly high US and steepening US yield curve. In Washington, the Senate voted to take up the fiscal stimulus bill yesterday, with VP Kamala Harris called in to break the 50-50 tie. However, amendments are incoming and could cause a revolt in the House from moderate Democrats, such as increasing the unemployment bonus from $300 to $400 a week. The bill needs to return to the House for another vote given the amendments before it is sent to President Biden for approval. The marathon session of votes is expected to extend the bill’s passage into the weekend. Meanwhile, US nonfarm payrolls data for February is due today at 13:30 GMT, with expectations sitting at a 198,000 net job gain. Any upward surprise relative to expectations could further fuel reflationary expectations, leading to higher US yields coming into play again and another wave of broad USD strength.


The euro tumbled below key levels against the dollar overnight, but dollar strength was the main character in this narrative after US Treasuries continued to rise following Fed Chair Powell’s underwhelming speech. From the European side, however, several virus narratives are also weighing on the currency. After Italy tightened virus restrictions in Milan earlier in the week, French Prime minister Jean Castex is expected to announce local weekend lockdowns in 20 areas with high infection rates today.  On the bright side, German Factory Orders, which is an indicator that includes shipments inventories and new orders, beat estimates with a 1.4% reading in January.  but the euro remained unfazed by the release. The figure rose despite Germany being in lockdown for over four months now and suggests manufacturing will continue to support the German economy throughout the lockdown. German Chancellor Angela Merkel set out a plan earlier this week to gradually ease containment measures, however, this plan only contains the reopening of some stores like gardening stores and book shops while there is no timeline given yet for the reopening of the hospitality sector. Finance Minister Olaf Scholz stated yesterday that Germany needs to increase debt spending this year to tackle the economic downturn caused by the virus, but declined to provide a specific figure. His remarks imply that support for many businesses will continue which bodes well for Germany’s economic recovery. In the very near-term, euro investors will watch actions and commentary by the ECB who is set to announce their monetary policy decision next week, until further progress is made on vaccinations and a lockdown exit strategy.


Yesterday saw sterling sell-off further as broad USD strength rippled through G10 FX markets. The catalyst was Chair Powell’s comments with the Wall Street Journal, which saw him strike more dovish tones than markets expected, resulting in another spike in US yields which filtered into a stronger dollar. With sentiment around the pound somewhat stagnant at present, given that markets await fresh information as to whether the UK can reopen as scheduled, sterling was vulnerable to the leg higher in the dollar yesterday. However, optimism around the reopening and earlier normalisation by the Bank of England provided the pound with some support on the way down, with GBPUSD losses capped at 0.42% on the day. Against the euro, sterling actually climbed 0.3%, highlighting this downside support for the pound as it was hit less hard by the swathe broad USD strength. Meanwhile, on the periphery, Brussel’s Brexit chief has warned the EU will launch legal action against the UK “very soon” after the British government planned to unilaterally grant Northern Irish businesses longer waivers from trading rules agreed by the two sides. While this isn’t having a direct impact on GBP price action, it highlights the post-Brexit transition period hasn’t been smooth, and that relations remain tentative. This is key considering many still expect the Brexit deal to be expanded to include services provisions in the near future. Today, sterling trades lower along with the G10 as a whole as the dollar remains supported by increasing yields putting pressure on risk appetite.


The Japanese yen continues to get hit by rising US yields as it slumped 0.91% yesterday despite the overall risk environment deteriorating. Rising US yields places pressure on the yen’s real carry differential and has resulted in the safe-haven currency being exceptionally sensitive to developments in US fixed income. The yen’s real yield on its 10-year trades flat amid an environment of rising real yields, and looks to continue to trade benignly after BoJ Governor Kuroda put dampeners on speculation the central bank may widen its target band for nominal 10-year yields. Kuroda stated “we are not at all at a stage” to adjust the current 20 bps target band either side of 0% despite analysts’ expectations that the range could be widened. With yields remaining flat as other DM yields rise, the yen continues to be put under pressure as it trades 0.3% lower against the dollar today. Meanwhile, the Chinese yuan is trading marginally higher offshore despite onshore markets closing in the red. The National People Congress kickstarted today with a growth target of above 6%, as well as creating 11m new jobs and trimming the budget deficit to 3.2% of GDP, being announced. The growth target was expected to be scrapped again this year, but as mentioned in yesterday’s morning report a minimum target could be announced – this ended up being the case. 6% growth from China, at a minimum, undershoots expectations during the recovery phase, which is also weighing on overall risk sentiment.



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