Despite a relaxed start to the year in terms of economic data, FX volatility was still plentiful. US political events provided much of the impetus for movements in the dollar, as the Democrats win in both Georgia run-offs resulted in the resumption of the reflationary trade, higher US Treasury yields at the back-end of the curve, and a resurrection in the US dollar. This dynamic was driven home once Congress resumed and confirmed Joe Biden as the next US President ahead of his inauguration on January 20th. Outside of events in the US, Saudi Arabia’s decision to unilaterally cut output in February and March by 1m barrels per day sent WTI back above $50 per barrel for the first time since the pandemic began, leading to substantial rallies in CAD and NOK. Meanwhile, the increasing prevalence of Covid-19 forced major European nations such as England, Scotland and Germany to tighten lockdown measures, while Canada and Japan also embarked on tighter localised lockdown measures.
Monday – 11/01
The Bank of England’s Silvana Tenreyro is set to speak on negative interest rates at 14:00 GMT, with the speech coming at an apt time for the BoE as speculation rises on what additional monetary support can be added given the latest lockdown measures imposed in England. So far, Tenreyro has made the most explicit comments on the efficacy of negative rates, with other MPC members stating that they’re most effective in the wholesale markets and during the later stages of the recovery. The Bank of Canada then release the Q4 Business Outlook Survey at 15:30 GMT, where future sales growth is likely to remain flat from Q3’s 39.00 reading, or even slip lower on the latest lockdown measures, while the outlook indicator is likely to continue printing in negative territory. The Q3 BOS showed broad signs of improvement in Canada’s economic conditions as major provinces reopened to a large extent, however, subsequent waves of Covid-19 and a tightening of lockdown measures is set to push business optimism back into the doldrums, at least for now. The focus sticks with central banks as FOMC member Raphael Bostic discusses his economic outlook for 2021 at 17:00 GMT. Given the latest developments in Washington, and markets beginning to price expectations of reflation and higher rates from the Fed in the coming years, Bostic will be able to temper expectations of an earlier tightening cycle by the Fed under a Biden presidency if the central bank deems it necessary.
Tuesday – 12/01
At 11am, South African manufacturing production data is due to be released for November with expectations suggesting a sharp slowdown in monthly growth is expected. After the manufacturing sector experienced a sharp rebound after lockdown measures were loosened, while the global economic recovery began in Q2/Q3, the natural slowdown in growth won’t derail markets too much. It is likely the data point will even fall to the markets wayside as South Africa’s domestic Covid-19 outbreak continues to dominate price action with many expecting the Economic Council to tighten the current adjusted level 3 lockdown on or before their meeting on January 15th. In Brazil, key inflation data for December will be released at 12:00 GMT, with the median expectation still pinpointing a moderate acceleration of 4.40% YoY by the end of the year. Even though expectations for BCB normalisation have been pushed back, investors still price in a steep hiking cycle through the next 6 months to three years. Fiscal stimulus has supported such perspectives, while inflationary pressures keep mainly concentrated in non-core components. The inflation report on Tuesday will provide insights on what to expect for the BCB’s upcoming policy path.
Wednesday – 13/01
ECB Lagarde speaks on the EU economy post-Covid and post-Brexit at an online conference. Lagarde will be closely scrutinised for further clarity on ECB’s revised outlook, after a renewed pandemic wave hits the eurozone economy over the holiday season.
Re Brexit, markets will find clues on whether previous ECB´s estimates on the economic impact of the UK divorce remain broadly consistent.
The National Bank of Poland will then release its latest rate statement at around 15:00 GMT where many expect the Governor to jawbone the zloty and even cut rates – more on this below.
Thursday – 14/01
On Thursday 14th, the ECB releases the minutes from its December meeting. In the last communication of 2020, the Central Bank expanded the envelope of PEPP by 500 billion euros until March 2022, while also easing further conditions on the TLTRO program. President Lagarde’s comments made clear once again that the institution is ready to act as appropriate to overcome the economic impact of the pandemic. Conversely, the ECB head also fed markets with a mildly bullish statement signalling the potential for spare capacity in the Pandemic Emergency Purchase Programme, which delivered a moderate upside push to the single currency. On release, next week’s meeting minutes will be heavily scrutinised in search of a possible policy response to the latest Covid-19 developments. With broad-base restrictions to economic activity tightened across Europe and a slow implementation of the vaccines rollout, risks to the economic outlook presented in the last meeting are tilted to the downside. As such, investors will dissect the acts for clues on the contingent policy outlook. On the same day, Germany will release its GDP data at 09:00 GMT highlighting the extent of the 2020 contraction, which is expected at 5.1% YoY. That compares with the record economic hit of the Great Financial Crisis in 2009, printing at -5.7% on a yearly basis. The German recovery has been led by the sound rebound of industrial production, which has managed to overcome the stringent lockdown measures imposed in the country by the end of Q4. With tightened and extended measures well into the end of the year and Q1, Tuesday’s GDP release will serve as an indicator on the size of the task posed for the economic rebound as restrictions remain in place at the start of 2021. On the other side of the Atlantic, investors will focus on US initial jobless claims in the week ending on January 9th, with the indicator showing little sign of subsiding. An increasing number of new claimants might continue to file petitions as infections and potential disruptions to the labour market reflect the relaxation in measures over the holiday season. The OPEC monthly oil market report may also draw some attention after Saudi Arabia’s decision to unilaterally cut output this week. With WTI trading above $50 per barrel, and Brent up at $55, FX markets are likely to tune into OPEC market commentary.
Friday – 15/01
Friday’s session is kicked off by the release of UK GDP data for November at 07:00 GMT, with consensus expecting a 4.6% MoM contraction due to the one-month national lockdown that was implemented from November 5th.
With hospitality and recreation, personal services and non-essential retail shutting under these measures, the economy undoubtedly shrank in November relative to October.
However, businesses were better suited to reverting back to lockdown conditions compared with before, meaning the economic hit is likely to be substantially less than during the first national lockdown back in March. Additionally, manufacturing and production remained open. The preliminary estimate of December’s GDP data will likely show marginal improvement as tiered measures meant much of the UK, at least for parts of December, exhibited looser lockdown measures relative to November.
ZLOTY DEFIES NBP’S FX INTERVENTION EFFORTS, PLACING RATE CUTS FIRMLY ON THE TABLE
The risks of a near term rate cut have increased due to the latest comments from the National Bank of Poland’s policy makers around looser rates, which were coupled with the confirmed FX interventions in December in an attempt to weaken the zloty.
While the currency interventions may have been effective for a couple of weeks, the zloty has since reversed losses to resume trading at 4.50 against the euro and 3.6 against the dollar.
PLN resumes its rally after a bout of FX intervention by the NBP over the course of December
The strong zloty has been a point of concern for the central bank for a number of policy meetings already, as several press statements in the past year stated “the pace of [the] recovery may be reduced by the lack of a visible and more durable zloty exchange rate adjustment to the global pandemic-driven shock and to the monetary policy easing introduced by the NBP”. This is most visible in Poland’s trade balance data, where the sustained improvement has been aligned with a continual depreciation in the zloty against the euro, suggesting the recent rebound in zloty strength may pose additional headwinds to the domestic recovery. Policy makers have been quick to drive this point home, stating that a weaker currency would be beneficial to exports. NBP Governor Adam Glapinski also stated that a weaker currency would boost the impact of loose monetary policy on the economy. Amplifying the effects of monetary and fiscal stimulus is pivotal for Poland after the NBP had purchased PLN107.4bn (4.7% of GDP) in Treasury and government-guaranteed securities, while the fiscal policy response is estimated at PLN149bn (6.7% of GDP).
Inflation in December fell by 0.7pp to 2.3% YoY, surprising the consensus of 2.6% to the downside and dropping below the 2.5% target set by the NBP. The decline was mostly driven by lower prices for food and core items, while fuel inflation showed an increase, reflecting the recent pick-up in crude oil prices. In January, an increase in the electricity price and the sugar tax may pose upward risks to inflation, but medium term inflation prospects remain weak as the continued weakening of domestic demand and a disinflationary external backdrop weigh on prices. In this light, along with renewed zloty strength despite explicit FX intervention, the drop in inflation below target may add weight to the NBP’s argument to cut rates next week.
NBP Governor Adam Glapinski confirmed that the central bank has been intervening in currency markets and signalled that a rate cut may be in the cards this quarter as well. Glapinski recently suggested that the central bank could cut rates in Q1 2021, from 0.1%, if the economic slowdown from the latest wave intensifies. Although he also stated that “the current level of interest rates is appropriate and best suits the current situation”, meaning a rate cut at next week’s meeting isn’t a certainty. While this may be the case, the recent advances in the zloty after explicit FX intervention by the NBP to weaken the currency suggests that a rate cut is more probable than not. Glapinski’s comments about a strong zloty being “very harmful” were backed up by monetary policy council member Grazyna Ancyparowicz who discussed that the NBP may be forced to cut rates further if the zloty starts to appreciate in a dangerous way, and Jerzy Zyzynzki stating that there is scope for polish rates to be reduced to 0%.
Several other members of the monetary policy committee have reported that there is no justification to reduce rates as real rates are already deep into negative territory.
At this rate, further cuts may do more harm than good to the macroeconomy and the NBP may be better off focusing on the ongoing increase in QE. The dovish comments by MPC members may therefore merely have been an attempt to weaken the zloty in the run-up to the meeting, rather than foreshadowing what the NBP will do next week. However, as Glapinski himself mentioned, a rate cut cannot be ruled out should virus conditions intensify. On balance, markets should prepare for strong jawboning from the NBP governor next week as a bare minimum, while also warming up for a possible rate cut and more explicit FX intervention from the central bank, especially as markets continue to test policymakers resolve.
LATEST COVID-19 WAVES FORCE FURTHER TIGHTENING IN MAJOR ECONOMIES WHILE VACCINES ARE SLOWLY ROLLED OUT
The recent spike in new cases of Covid-19 and news of the more transmissible B.1.1.7 Covid-19 variant has forced many major economies to tighten lockdown measures as they scramble to distribute vaccines in order to shield the most vulnerable in society. Over the last week, both England and Scotland have entered another national lockdown in an attempt to contain the recent parabolic rise in case count, while Quebec – Canada’s second largest province – has also implemented a provincial wide curfew until February 8th, along with tightening lockdown conditions at the margin. In mainland Europe, Germany extended its lockdown until the end of January instead of lifting parts of the measures on January 10th, while also imposing a 15km travel radius in areas where new cases exceed 2,000 per million residents. Meanwhile, in France, curfews have been tightened in some jurisdictions, but national lockdown measures are yet to be enacted, although ministers continue to reiterate that they are a viable option should cases tick up due to the festive period. In Japan, Prime Minister Yoshihide Suga declared a state of emergency will be in place in Tokyo and three neighbouring prefectures from January 8th until February 7th, as Japan’s death toll has doubled in less than two months while hospital infrastructure begins to be strained. Under the new measures, Suga called for teleworking to reduce commuting by up to 70% and also requested restaurants to voluntarily close at 8pm. However, with schools and the hospitality sector remaining open, critics suggest that this is just the start of tighter and more protracted lockdown measures in Japan’s capital.
UK and Germany tighten national lockdown measures as cases climb
Rise in cases in Japan and Canada are focused on large metropolitan areas
New cases have risen substantially in countries like the UK and Germany, forcing tougher national lockdown measures as localised policies failed to control the outbreak. Meanwhile, in Canada, Japan, and France, the rise in new cases has been concentrated geographically, meaning they have been met with more targeted responses. However, the rise in new cases doesn’t tell the whole story. New cases are subject to levels of testing also, which has been ramped up since mid-December in countries like the UK. However, data on positive test ratios is also concerning, with all countries excluding France exhibiting a sharp rise in the number of tests confirming Covid-19. This suggests that the rise in new cases isn’t necessarily a by-product of increased testing, but a true underlying increase in the severity of the outbreak. This is also confirmed by anecdotal evidence on reduced hospital capacity in these areas.
Positive test rates climb in all countries but France
With lockdown measures incurring huge economic costs, the focus remains on how quickly authorities can distribute effective vaccines such that economies can begin to reopen. Over 17.5 million doses have been distributed so far in 38 countries, as the biggest vaccination campaign in history is rolled out. Seven vaccines are currently available for public use, with the three pioneer candidates, from Pfizer/BioNTech, Moderna and AstraZeneca/Oxford, catching most of the attention. Vaccines are becoming available at a record pace, bypassing years of approval processes. Considering the joint effort from all of them, some 8.25 billion shots have been already pre-purchased, which means more than half of the global population should receive the two-dose vaccines this year. AstraZeneca´s vaccine should lead the race, with advanced agreements to cover 1.46 billion people, more than twice than any other competitor.
Strategies to secure vaccine deals vary substantially across countries, setting the tone for a widely uneven distribution.
Major economies like the US, EU, UK and Canada have struck unilateral deals with production companies. Meanwhile, several countries will receive the medicine through the Covax mechanism, a consortium backed by the World Health Organization. Cheap vaccines will be delivered throughout most Latin American countries under a deal brokered by Mexican billionaire Carlos Slim. Russia and China rely on domestically produced vaccines –Sputnik V and Sinopharm respectively, which would be presumably provided for their entire national population. Other vaccines will likely be manufactured outside of these agreements. So far, advanced economies lead the race of vaccination, having cleared at least one of the top three vaccines for emergency use already.
Timeline to top Covid-vaccine approval
The US keeps ahead in the race of Covid vaccination, with 6.25 million doses already applied. However, the domestic rollout has disappointed federal projections, which aimed to distribute 20 million doses by early January. In terms of shots supplied per 100 people, the UK is the major economy in the lead, following the outstandingly fast implementation in Israel and the U.A.E. Other major economies like the EU or Canada lag behind, even though secured vaccine deals are meant to cover 1.83 and 3.03 times the size of their population respectively. In France, for instance, criticism has mounted over the limited capacity of the government to move forward given the high distrust of the public towards the vaccine. In Japan, where authorities also face a highly reluctant population, no vaccines have been approved to date, pinpointing the start of the immunization campaign for late February. Other countries like China and Russia started vaccination way in advance, before the shots weren’t fully tested, but there are less frequent data updates on their progress. Although promising, the slow rollout of vaccination across the globe depicts the numerous hurdles in the path to immunization, at a time when increasing infections and restrictions pose downside risks to the expected economic recovery. Just as alarming as the new case data and positive test ratios are, many economies only plan to stay within stricter lockdown measures until the vaccine is effectively distributed to those at high risk, thus allowing the resumption of economic activity without placing undue stress on healthcare systems. With this in mind, markets will keep as close of an eye on the distribution of vaccines as they will incoming lockdown measures as they attempt to gauge the true economic damage caused by Covid-19 and when the economic recovery will resume.
Covid vaccination across the world
Simon Harvey, Senior FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst