News & analysis


The loonie closed the day out yesterday relatively flat, despite the drop in WTI from highs of $67.98 to $65.05 upon close. This morning, the Canadian dollar is trading on the offensive along with G10 counterparts as the broad US dollar environment flips amidst a cooldown in fixed income markets. Data out yesterday saw the Bloomberg Nanos Canadian Confidence Index reach a three year high last week as vaccine distribution and higher house prices spurred on consumer optimism. The Prime Minister said the vaccine distribution is picking up speed after his procurement chief said it’s “highly likely” the government’s vaccine timeline will accelerate in coming months. The positive beats in data highlight the strength of the underlying economy, which will soon be realised in the hard data points like GDP once lockdown measures are scaled back more substantially. This dynamic is being replicated in money markets, with overnight index swaps pricing a rate hike from the Bank of Canada as early as mid-2022, despite the central bank’s own guidance stating a hike isn’t pencilled in until 2023. The expectations of policy normalisation will be of high concern for the central bank, which is due to issue its latest policies tomorrow at 15:00 GMT. With such a big event in store for the Canadian dollar, it is likely the currency will trade comfortably in the middle of the G10 pack today against the dollar.


The US dollar had another strong outing yesterday as US yields did the damage yet again in the FX space. Rising yields put pressure on US stock indices too, with both the S&P 500 and Nasdaq closing in the red, while industrials in the DJIA performed well on reflationary hopes. This morning, however, the dollar DXY sits firmly in the red as US yields cool down, leading the rest of the G10 fixed income space lower. In this environment, risk is better supported, which is evident in the FX space with higher beta currencies outperforming against the greenback this morning. However, the rally in FX markets is only subject to conditions remaining the same as they currently are. Previously, US markets have woken up and changed the dynamic, but with very little in the data calendar ahead of tomorrow’s CPI release for February, the subdued nature of fixed income markets may be here to stay for the day.


The euro was among the many currencies hit by the strong US dollar yesterday but managed to find its footing amid improved risk sentiment this morning, with the single currency strengthening against USD, JPY and CHF and weakening against AUD, NOK and GBP. European Central Bank Governing Council Member Francois Villeroy de Galhau stated yesterday “the recession is behind us” when discussing the French economic outlook, backed up by French Finance Minister Bruno Le Maire who stated the economy will quickly recover once the current covid restrictions are lifted. In similar lines, Villeroy highlighted yesterday that the ECB must respond to market tightening and recommends the central bank to react against any unwarranted rise in bond yields, mainly by the use of the pandemic QE programme also further rate cuts should not be excluded, according to him. Executive Board member Fabio Panetta added to the comments yesterday and stated the ECB “should not hesitate” to increase the pace of the bond-buying if needed, and warned that the jump in yields in recent weeks “is unwelcome and must be resisted”. All of yesterday’s commentary pointed to more action by the ECB, which is why markets were left confused when last week’s Pandemic bond-buying data came out yesterday and showed a slowdown in purchases, eroding any effect verbal intervention may have. The euro’s response so far is muted as redemption data from later in the week will shine a light on the net purchases by the ECB while markets also await Thursday’s monetary policy decision. Meanwhile, Italy’s total Covid-related deaths surpassed 100,000 on Monday, and Prime Minister Mario Draghi stated the situation is worsening again. With the acceleration of the vaccine plan and yesterday’s green light to use AstraZeneca vaccines for adults over 65, an exit from the pandemic isn’t far away, according to Draghi. The Netherlands extended its lockdown until the end of March, but this was widely expected. Focus now turns to euro area revised Q4 GDP and employment figures at 10:00 GMT.


Sterling performed relatively well in a strong dollar environment yesterday, with GBPUSD falling only 0.09% on the day, while GBPEUR rose by 0.56%. Sterling is trading on the front foot this morning, however, as it sits 0.4% higher against the dollar. The pound lags only the Aussie dollar and Norwegian krone when measured against the greenback. Sterling’s rally is likely that of a bigger picture, with G10 currencies, especially higher beta currencies, regaining some ground against the dollar after weeks of losses. Specific to sterling, however, is positive vaccination news that has been coupled with Covid-19 cases falling to their lowest since September. Meanwhile, Bank of England Governor Andrew Bailey struck less dovish tones than many were expecting in his speech yesterday, prompting many to believe the BoE will join other central banks like the Norges Bank and Reserve Bank of New Zealand in hiking rates before the Federal Reserve. The light is seemingly at the end of the tunnel for the UK economy, which yesterday embarked on its first phase of reopening when it opened schools. Sterling’s rally resumes on this narrative of positive sentiment but is subject to being knocked off course by another swathe of USD strength.



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