News & Analysis


The loonie is trading a touch softer today after retracing losses on Friday following the US nonfarm payrolls data. With the US dollar bouncing after the release, and US equity indices trading in the red in the aftermath, the loonie slid 0.56% on the day, before the equity market retraced to trade in the green, allowing the Canadian dollar to close 0.08% higher on the day. The correlation between CAD and the S&P 500 continues, especially in this reflationary environment. Positive real yields on the 10-year note continue to help the loonie buffer the effects of rising US yield. Despite the Canadian nominal yield curve rising at a similar rate to that of the US, markets are pricing in an earlier and faster normalisation of policy in Canada. This will be a concern for the Bank of Canada, who are set to release their latest policy decision on Wednesday ahead of February’s labour market data on Friday. While we don’t expect a material change in the BoC’s stance on Wednesday given there is no press conference scheduled, a dovish tone from the central bank could differ from the Fed’s recent laissez-faire attitude on the developments, placing upside pressure on USDCAD. This morning, a higher WTI price is helping the loonie somewhat, but the impact rising middle eastern tensions is having on oil prices is yet to filter into FX markets as the move is seen as transitory. The data calendar is light ahead of Wednesday’s BoC meeting, with just the Bloomberg Nanos survey results due today at 13:00 GMT.


Pricing of the US dollar amid the current reflationary environment caused masses of volatility on Friday after the February Nonfarm Payroll release. The data saw the US economy add 379k jobs in February, 179,000 more than expected, at a time when the economic recovery was meant to stall. While the job gains were skewed towards virus-sensitive industries, the improving public health situation in the US calls for higher job gains in the future – what many are dubbing the “incoming jobs boom”. Upon the announcement, the US 10-year yield climbed as high as 1.6238% before retracing to close at 1.566% as markets ran with the idea of a faster recovery and thus higher inflation in the US. Meanwhile, US equities felt the pressure of higher risk-free rates in the US, before the dynamic of a faster economic recovery took over when US yields fell, helping US equity indices close in the green. In FX, the combination of rising yields and a better payrolls print resulted in the DXY rising 0.36%, with the whole of the G10 currency board sitting in the red with the exception of NOK. Beyond that, the US is showing signs of reopening as several states flung open the doors to normal social life with restaurants, hotels and cafes reopening along with theme parks. As the full economy reopens, the question will be whether there will be structural changes to the labour market. A risk remains that the return of the labour market takes longer than just returning from temporary layoffs as labour reallocation across industries is likely needed. Atlanta Fed President Raphael Bostic responded to the labour market issues on Friday and stated the Fed needs to do “all we [they] can to minimise the long-term damage from the pandemic crisis and to make sure that the recovery is as broad-based and as inclusive as possible. As the Fed enters a two-week blackout period starting today, markets expect no further commentary from Fed speakers these weeks. Instead, focus returns to changes in risk sentiment and vaccine developments.


The euro is trading mixed across the G10 space as it is dragged into the broader USD strength, however idiosyncratic drivers for the euro may finally come to the fore as markets await for the European Central Bank’s APP report today after last week’s report showed a slowdown in bond-buying. The ECB stated several times it is monitoring the increase in yields, with some policymakers including Chief Economist Philip Lane even signalling the pace of the Pandemic QE purchases should be increased, making markets raise their eyebrows at last week’s data. The question will be whether the ECB will offset last week’s report by a significant increase in purchases this week to show it is committed to keeping financing conditions favourable and keeping bond yields under control. Beyond the purchases, market participants will watch further commentary by the ECB ahead of Thursday’s monetary policy decision, where the bond rout and increasing yields will undoubtedly be addressed. This morning’s data calendar included a sharp contraction of 2.5% in German industrial production vs a contraction of 0.4%. The headline is worse than what markets had anticipated, but it is consistent with the retail sales reported on Friday. Production fell in January, but the reversal of the VAT cut was likely the main driver of this, indicating that February’s report may show a strong rebound. For the remainder of the morning, markets focus on the euro area March Sentix Investor Confidence at 09:30 GMT.


Sterling is no exception to the bout of broad US dollar strength in markets at present, despite the economy reaching its first milestone on the roadmap to reopening as schools in England reopen this morning. The pound trades 0.1% lower against the dollar but continues to hold onto its spread over the euro amidst the reflationary environment. For the pound, the calendar is fairly light ahead of next week’s Bank of England meeting, but Governor Bailey’s comments on the economic outlook today at 10:00 GMT may provide markets some insight into the central bank’s outlook ahead of the blackout period. Beyond that, GDP data on Friday will hold the key for the pound, which trades at the mercy of the broad US dollar at present.



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