News & Analysis


Despite hawkish undertones from the Bank of Canada yesterday, the loonie still succumbed to a 0.53% loss against the greenback as the risk environment deteriorated amid new lockdown concerns. Yesterday, when speaking in front of the CFA Society Toronto, BoC Deputy Governor Toni Gravelle gave markets the clearest sign to date that the BoC will be tapering its QE programme imminently, raising bets that such a move will occur at April’s meeting. When speaking on post-pandemic measures, such as the QE programme, Gravelle announced that the central bank will suspend its main short-term financing facility in May and won’t extend three other asset purse programmes expiring in coming weeks, which include those for commercial paper, provincial bonds and corporate bonds. This should trim about C$100bn off of its balance sheet by the end of April. On its purchase of Candian government bonds (CGBs), Gravelle said the BoC is seriously considering the option of tapering and are discussing how it would work. Unlike other G10 central bank’s, this would be the BoC’s first QE programme. Gravelle highlighted that the tapering of purchases would be “gradual and in measured steps” as the central bank aims to continue the same level of monetary accommodation throughout the tapering stage, likely by targeting specific parts of the CGB curve. Comments by Gravelle resulted in a brief spike in Canadian bond yields, but both the 2-year and 10-year closed lower on the day. Despite these hawkish tones, the loonie was under pressure, largely due to the 5.75% drop in WTI in yesterday’s session. The latest API report highlighted that crude stockpiles rose by 3m barrels in the US last week. Coupled with renewed lockdown fears in Europe and rising case counts in other regions such as India, the news weighed on WTI futures. Today, the DoE crude inventory report at 14:30 GMT will be key, with oil markets having stabilised largely due to a ship blocking the Suez Canal – a key shipping lane.


The US dollar is enjoying the risk aversion in markets and extended broad gains from yesterday, while Fed chair Jerome Powell and Treasury Secretary Janet Yellen appeared before a House committee yesterday. Powell continued to downplay the risk of inflation and stated the inflationary effects won’t be particularly large or persistent, while Yellen discussed “deep pockets of pain” that persist in the economy. Treasuries advanced after the inflation comments and the dollar index climbed to a two-week high, although it is hard to dissect what is driving the decline in yields; a flight to safety or the Fed’s dovish comments. For today, risk aversion will likely continue to dominate FX markets, meaning USD should stay elevated among other safe-haven currencies. Meanwhile, the dynamic duo consisting of Powell and Yellen are set to appear again this afternoon in front of the Senate banking committee this time. Meanwhile, comments from FOMC member Daly and Evans will be in scope as markets try to gauge just how dovish the consensus at the Fed is. This follows comments from Governor Brainard yesterday which hammered home the dovish message of sitting behind the curve and showing caution.


The third wave in Europe is starting to materialise further with both Germany and the Netherlands extending their lockdown measures until mid-April and tightening them as cases surge. This weighed on the euro throughout yesterday’s trading session as it combined with the strengthening of the US dollar spurred by weak risk sentiment. In Germany, stores that had just opened their doors again for planned visits remain closed now, while in the Netherlands, any services where social distancing is not possible, like hairdressers, are closed again. As markets are digesting the new risk-averse mood, German preliminary Purchasing Managers’ Index figures were ignored this morning with EURUSD falling to November lows despite the manufacturing PMI printing at a whopping 66.6 vs the 60.5 consensus. In a risk-off environment like today’s, poor data accelerates losses while better-than-expected data will be ignored. The PMI surveys are also conducted with a lag, meaning that the most recent announced lockdown extensions are not included in the data. Meanwhile, services PMIs still lag with the lockdowns weighing on this sector the most. With economic data being of no help, markets turn to European Central Bank’s Christine Lagarde at 15:40 GMT for further cues on the outlook, although they are unlikely to get much direction considering her speech is focused on climate change.


Sterling is struggling under this renewed risk-off climate as it slumps near half a percentage point against the dollar this morning, following losses in the magnitude of 0.8% yesterday. The pound is struggling to break its recent consolidation with most of the positive news already baked into its price, making it highly susceptible to the renewed risk-off climate. While we don’t expect a weaker pound to become a structural dynamic, the recent consolidation may continue for some time. That is until additional positive news and data start to seep into the frame. This morning, CPI data for February disappointed. Headline inflation fell from 0.7% YoY to 0.4%, with the core reading undershooting at 0.9% YoY vs 1.4% previous. The downturn in inflation was largely due to the downturn in clothing prices, which fell 5.7% in February – the lowest reading since November 2009 – as man retailers were left with excess stock to shift due to the reimposed lockdown. The downturn in inflation data is set to be transitory, especially considering base effects come into play as of March’s reading. There is little scheduled for sterling beyond the CPI release, placing the emphasis on the broad risk environment and vaccine headlines.



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