News & Analysis


The loonie struggled to join the G10 rally in the run-up to last night’s Federal Budget, however, after Finance Minister Chrystia Freeland outlined C$101bn in new spending over the course of the next three years, the loonie quickly retraced its losses to drive back up to recent highs. The spending package was marginally above the C$70-100bn level touted by Freeland back in November’s fiscal snapshot, but this was largely due to the extension of pandemic related measures such as the Canada Emergency Wage Subsidy and Canada Recovery Benefit. The extension of the flagship wage subsidy programme until September 25th is estimated to cost C$10.1bn, with the level of support tapering from July. The largest item in the latest budget was the new funding for daycare initiative, which is estimated to cost C$30bn over the next 5 years. Overall, the fiscal outlay remains large, at around 4.4% of GDP when measured in 2019 terms, but with large fiscal stimulus packages normalised across the G10 space, bond markets didn’t throw their toys out of the pram as such despite the widening of the fiscal deficit. Therefore, FX markets focused on the growth impact of the budget. The outlay not only shelters the labour market for longer, but it also aims to drive the recovery and green investment over the coming years. This will only improve the economic outlook in Canada ahead of Wednesday’s Bank of Canada meeting. This has only reinforced the market’s assumption that the central bank will taper its QE programme in response to the developments.


Nearly all currencies took a chunk from the greenback yesterday as risk appetite made a comeback in the early London session despite ongoing geopolitical tensions between the US and Russia. Risk-on currencies are riding higher on the back of vaccine optimism, pushing the DXY index down for a seventh day to touch its lowest level in nearly two months. Dollar traders await further headlines on President Joe Biden’s infrastructure spending plans today, after Biden met with a group of bipartisan lawmakers on Monday to discuss his $2trn infrastructure plan. The GOP has condemned the bill as it argued that much of the spending plan is directed toward nontraditional infrastructure, such as support for home health care workers or clean energy tax credits, and Biden has made it clear he is willing to compromise on both the content of the package as well as how to finance it. The economic calendar is virtually blank for the US today in the absence of both economic data and central bank speeches, shifting the focus back to developments in US Treasury yields and headlines around the stimulus package.


The switch to a risk-on market mood in the G10 FX space and positive vaccine headlines supported the euro’s 0.88% increase against the US dollar. This morning’s session saw an extension of the weaker dollar, pushing the pair up by another 0.32% since midnight. The European Medicines Agency is set to publish a decision on the safety guidelines of the Johnson & Johnson Covid-19 vaccine later today after reports claimed blood clots as a side effect of the shot. The EU has already reported it may not renew its contract with AstraZeneca and Johnson & Johnson next year, as Brussels would rather focus on mRNA vaccines such as Pfizer’s and Moderna’s, however the EU will keep options open to be prepared for the next stages of the pandemic in the years to come. Today’s EMA verdict could further boost sentiment in the eurozone if the regulator continues to recommend usage. If the Astra verdict from earlier this month is anything to go by, there is a good chance the EMA will allow its use, although they may enact an age limit. The J&J supply should unleash another 55 million jabs in Q2, which is a little over half of the total shots currently given in the EU. With today’s data calendar being empty for the eurozone, focus turns to ECB’s Pablo Hernandez de Cos at 13:50 BST who will deliver the opening speech at a virtual event on financial regulation in the current macroeconomic environment. Markets will watch any optimistic tones in his speech as a prelude to ECB President Christine Lagarde’s press conference on Thursday.


Sterling rose over a percentage point in yesterday’s session as the dollar substantially weakened across the board. Despite the backdrop of broad USD weakness in G10 FX, sterling’s rally mustn’t be understated. The pound led gains against the dollar in the G10 space as sentiment around UK assets improved with alternative data points highlighting a robust week of economic activity as the UK economy reopened. GBPUSD closed out the day over a percentage point higher as it stopped short of a key psychological level. With renewed USD selling in this morning’s session, however, GBPUSD managed to break the said psychological level to trade at levels not seen since late February. Data out this morning has helped the pound, with the ILO measure of unemployment dipping from 5% to 4.9% in the three months up to February, while the claimant count measure of unemployment fell from 7.5% to 7.3% in March. The data, although skewed by the government’s furlough scheme, compounds alternative data points from last week which saw job postings online rebound to levels not seen since the pandemic took a hold. With little else scheduled for the day and sterling’s trajectory set for the time being, the pound will be at the mercy of broad USD price action, especially as it comes into contact with key resistance levels.



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