News & analysis

CAD

The loonie was lifted in yesterday’s trading session as vaccine hopes helped boost risk sentiment which was already well supported on the signing of the RCEP trade deal. The loonie rallied 0.46% open-to-close in yesterday’s trading session, with the only economic development coming in the shape of housing market data. Canadian home sales dropped for the first time since April in October, falling 0.7% nationally from a month earlier. Benchmark prices continued to rise, posting a 1 percentage point gain from September’s level, but recent data suggests house price growth will begin to cool as more properties sit on the market in the country’s largest cities. This comes as the backlog of demand filters through and the second wave in Canada cools the economic recovery. With Canada’s high household debt-to-GDP levels, a slump in the housing market poses big risks to the economic recovery as the level of relative debt for each household rises, providing a negative wealth effect. A full blown crash in the housing market is the Bank of Canada’s worst nightmare but the prospect of such an event occurring with the levels of fiscal and monetary support in play looks distant at the present moment. Today, the loonie returns to posting minor losses against the dollar along with NZD and AUD. While the weakness in the antipodean currencies is idiosyncratic, the loonie’s bearish tilt continues from last week’s trading. With the dollar weakening as cases in the US rise, the picture for Canada’s current account also deteriorates, hence why the loonie is struggling to rally on the back of broad USD weakness. Additionally, Canada is currently embattled with its own domestic outbreak which continues to weigh on the currency’s fortunes somewhat as it trades near two-year highs.

USD

The dollar was subject to a broad risk rally in yesterday’s session after optimism around the RCEP trade deal was compounded by positive results from Moderna’s latest clinical trials. The biotech company announced that its Covid-19 vaccine had shown 94.5% efficacy in clinical trials which spanned more than 30,000 volunteers. Not only was the trial more effective and of a larger scale than Pfizer’s, who reported results just over a week ago stating its vaccine was 90% effective, but the Moderna vaccine is also said to be easier distributed with respect to transport temperatures and its shelf life after being thawed. This helped boost market risk sentiment further, weighing on the dollar. While the market rally continues in today’s session, the dynamic in play has arguably switched. Despite positive developments on the vaccine front, the progression of Covid in domestic economies continues to dominate the markets focus in the short-term. In that light, the latest lockdown measures implemented in California and Michigan, along with tighter measures in Oregon, Washington and New Jersey, are likely to keep the dollar capped in the coming weeks. The second wave in the US is starting to climb rapidly with the US adding a million new cases in the first 10 days of the month alone. The seven-day moving average for new cases has jumped 37% recently, the fastest at any point since late March. The dollar is likely being weighed upon from this angle. Retail sales data for October, released at 13:30 GMT, may turn the tide for the greenback, but the focus is likely to remain on the response measures being implemented at the state level. Fed Chairman Jerome Powell is expected to speak at a moderated Q&A at 18:00 GMT.

EUR

The euro remained largely flat over the day against the dollar yesterday, with the headline that Hungary and Poland will veto the 7-year EU budget passing largely without incident in currency markets. Both nations followed through on their latest warnings that they would not agree to new rules linking spending to the rule of law norms. The veto will further delay the EU’s budget deal, which was already agreed at the summit in July and offered great support to the euro. Spain’s Minister of Economy and Business Nadia Calvin,  however, expressed optimism that the issue will be resolved in the coming days. The budget is meant to take effect on January 1, and officials will aim to have the agreement signed within weeks. Meanwhile, Angela Merkel urged Germany to limit public and private gatherings in a meeting with the country’s 16 state premiers, but failed to push through a range of tougher restrictions. They will  next meet on November 25. With today’s economic calendar being sparse for the eurozone, focus turns to vaccine developments. During yesterday’s European Commission press conference, EC President Ursula von der Leyen stated the EU signed a deal with pharmaceutical company CureVac for a purchase of 405 million vaccines. Any positive headlines on the efficacy rate of the CureVac vaccines may prove positive for the euro.  So far, the EU has signed pre-orders with AstraZeneca, BioNTech, Johnson & Johnson, Sanofi, Pfizer, and CureVac, with the CureVac pre-order being the largest one to date.

GBP

Sterling reached fresh highs against the US dollar yesterday morning, but pared back its gains slightly after that. The trajectory of coronavirus restrictions  are in focus this morning, after Public Health England’s Dr Susan Hopkins said last night that the tier system would need to be “strengthened” after the current, strict lockdown ends in December. The overwhelmingly positive news on the effectiveness of incoming vaccines may be interpreted as a reason for Governments worldwide to double down on attempts to reduce covid-19 deaths, as an effective vaccine around the corner means that there is a less drastic trade-off between deaths and economic activity in the long-run. Politico is reporting that lockdown will end as planned on December 2nd, but that the previous three-tier system will be tightened – Dr Hopkins said yesterday that tier 1 had “very little effect”. Bank of England Governor Andrew Bailey will speak at a virtual conference at 15:00 GMT, followed at 18:00 by the Monetary Policy Committee’s David Ramsden.

 

 

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