News & analysis


The Canadian dollar had a fairly quiet day against its US counterpart yesterday as it closed the session out just 0.04% lower. Without any groundbreaking news out of Canada, we expect this theme to persist until Friday’s labour market data provides fresh data to judge the Canadian economic recovery off of. The only notable development out of yesterday’s session came from Bank of Canada Deputy Governor Schembri, who spoke at the Hoover Institution at Stanford University, California. Schembri stated that the Bank of Canada could allow a minor overshoot in inflation before normalising policy, or even switch to a formal average inflation targeting regime like the Federal Reserve, before normalising policy. While the switch to an AIT framework is currently being discussed in the Governing Council, comments by Schembri reinforce our view that the BoC will informally run a weak version of an average inflation target framework before conditions warrant tighter monetary policy. Following on from these comments, the speech by BoC Deputy Governor Lane on the 10th will now be examined for further signs of a shift in the tone of the Bank of Canada’s decision making.


Concerns over vaccine outbreaks, distribution and the state of DM economies continue to prop up the US dollar, which finds itself back to early December levels when measured by the DXY index. The dynamic witnessed in markets this week has been that of a firm US dollar against most of the G10, with the exception of AUD and NZD on the whole, with both Antipodean economies benefiting from low case counts and a broad reopening of their economy. While this dollar dynamic is a general theme, it did have some blips when the RBA decided to loosen policy further on Monday, resulting in AUD weakness. Additionally, the surge in oil prices at the beginning of the week allowed both NOK and CAD to also post gains on Tuesday. Yesterday, data out of the US evidenced why the dollar divergence with most of the G10 took place, as US services PMIs for January were revised up from 57.5 to 58.3 at a time when most service sector PMIs in the G10 are struggling to break into expansion territory above the 50.0 mark. Today, the focus will be on the US labour market as initial jobless claims are expected to remain elevated at 13:30 GMT. With a lot of uncertainty surrounding the level of US fiscal stimulus and the timing of it, gauging the level of damage sustained to the labour market will be key in assessing how effective each fiscal stimulus proposal will be.


The euro found modest support in the news that Mario Draghi accepted the mandate to try to form a new government yesterday. Although the possibility of new elections could ultimately mean times of uncertainty are around the corner, Draghi’s experience as former ECB chief may be exactly what is needed to assuage market jitters. This can be seen in the fact that Italian BTPs continued to rally and the BTP-Bund spread narrowed by the most since June over the course of yesterday. Today is a light day on the data calendar, with eurozone retail sales at 10:00 GMT being the main release of note, and comments from ECB’s Hernandez de Cos are unlikely to incite much euro price action as his speech will be on financial education. This takes all focus back to vaccine headlines for any short- and medium-term euro direction while virus news and lockdown measures continue to stir the currency in the short-term.


After what was a muted session for sterling yesterday, the pound finds itself under substantial pressure this morning as traders report high levels of positioning in the Asian session ahead of today’s mammoth Bank of England meeting. While the BoE is unlikely to change its policy tools this time around, maintaining the Bank rate at 0.1% and leaving the QE programme untouched, a downgrade to its forecasts and an assessment on the viability of negative interest rates are expected. It is our belief that the Bank will also loosen the criteria of its Term Funding Scheme for SMEs (TFSME) as March 2020’s rate cuts are yet to have fully filtered through to mortgage rates and higher loan-to-value rates. On top of that, we expect Governor Bailey to outline that negative rates are feasible in the UK financial system, but that they won’t be deployed anytime soon. While this will be a net dovish meeting in that sense, the pound could find a wave of support after trading 0.4% lower in the run-up to the announcement. Although, the tone in which Governor Bailey strikes around the discussion of negative rates will be the key for both fixed income and FX markets alike.



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