News & analysis

FX markets have been choppy over the course of the week, with risk appetite generally well supported but the risk rally being interrupted by concerns over rising US yields mid-week.

The background for markets has been that of positive virus headlines.

The World Health Organisation announced that new cases globally fell 16% last week, while positive vaccine news also trickled through. With vaccine distribution remaining top of mind, this week we released our first edition of the Monex vaccine distribution chartbook. In the chartbook, it is evident that vaccine distribution in the UK has outstripped that of other major economies, resulting in the pound rallying to new highs against both the euro and dollar. Expectations are high for Prime Minister Johnson’s statement on Monday, where he will outline the conditions needed for a phased reopening of the UK economy. With limited top tier data releases in next week’s calendar, we take a look at next week’s announcements in the UK and what they mean for the pound, while also preparing for the upcoming Reserve Bank of New Zealand policy decision due to be released on Wednesday.


Monday – 22/02

Monday morning’s agenda contains IFO expectations and current climate assessments from Germany at 09:00 GMT. The IFO is a leading indicator of economic activity in Germany and is expected to print slightly higher than the prior reading, indicating that sentiment may have improved since last month despite the eurozone’s slow-going vaccination progress compared to other developed nations. The expectations index is set to come in at 91.8 while the current assessment is expected to print at 89.3. Any surprises to the upside may temporarily lift the euro, but the currency remains weighed down by the lag in vaccine distribution and stringent lockdowns.

Tuesday – 23/02

UK labour market data for December is released at 07:00 GMT, along with claimant count data for January. These data points are likely to be overshadowed by Boris Johnson’s plans for reopening the economy on Monday, but they are likely to have consequences on what the March budget looks like. More on this is discussed below. At 10:00 GMT, the eurozone comes out with final CPI inflation figures for January. The year-on-year figure is set to print at a positive 0.9%. The MoM figure is set to remain unchanged at 0.2%. Until the vaccinations allow for a gradual reopening of the eurozone economy, CPI inflation will likely be of less interest to currency markets. However, any big surprises in the figures will continue to catch the markets’ eye. Fed Chair Powell is then expected to deliver the semi-annual monetary policy report to the Senate Banking Committee at 15:00 GMT. At 17:30 GMT, Bank of Canada Governor Tiff Macklem is due to speak at the Edmonton Chamber of Commerce & Calgary Chamber of Commerce. While the title of the event hasn’t been published yet, Canadian investors will likely focus on Macklem’s comments due to the limited amount of communication from the BoC this year. In January’s meeting, we deemed the BoC to strike a mildly hawkish tone as they disregarded the prospect of mini rate cuts and hinted at QE tapering towards the end of the year.

Wednesday – 24/02

At 01:00 GMT, the Reserve Bank of New Zealand is set to release its latest policy decision.

We expect the central bank to upgrade its growth projections but maintain a cautiously optimistic tone in order to moderate expectations of near-term rate hikes.

A preview on the Bank’s meeting is supplied below. The final reading of Germany’s Q4 GDP is then released at 07:00 GMT with expectations set at no change at -3.9% YoY. To cap off the day, the Department of Energy’s US inventories data is released at 15:30 GMT and is likely to continue placing upwards pressure on oil prices. This comes as WTI slips back below $60 at the end of this week due to production seen coming back online in the US shale industry after it was impacted by cold weather.

Thursday – 25/02

Several Italian confidence indicators are on the agenda for 09:00 GMT on Thursday. Both the manufacturing and consumer confidence indices are expected to have increased from January’s readings, while there is no consensus available for the economic sentiment indicator. This theme is expected to be replicated in the eurozone-wide confidence indices released at 10:00 GMT, where expectations foresee a modest increase from 91.5 to 92.0 for the economic confidence index and an improvement from -5.9 to -5.0 in the industrial confidence index. As eurozone Purchasing Managers’ Index figures showed earlier this week, the manufacturing sector has held up steadily, tilting risks to the confidence indicators to the upside. The second reading of Q4 GDP out of the US is scheduled for release with initial jobless claims data at 13:30 GMT. The GDP data is expected to be subject to a minor upwards revision from 4.0% to 4.1%, while jobless claims data may continue to rise in the US ahead of the fiscal stimulus package being passed. Durable Goods Orders will be released by then as well, with orders set to have increased in January by 1.3% compared to December’s 0.5%. Following the upwards surprise in January’s retail sales data which printed at a whopping 5.3%, largely due to the impact of the $600 direct cheques being released from the last fiscal stimulus package, risks are tilted to the upside for the durable goods release.

Friday 26/02

The data calendar quietens down on Friday, with the only notable data points coming from the US and Norway. Norway’s unemployment rate for February is scheduled for release at 09:00 GMT after having jumped to 4.4% in January up from 3.8% in December. US PCE inflation data for January is then due out at 13:30 GMT and will be keenly watched amid the reflationary environment in markets. A further discussion of US inflation was provided in last week’s edition of the week ahead.




Sterling’s recent rise towards the 1.40 level against the dollar and to 11-month highs against the euro can largely be attributed to growing expectations of lockdown measures being eased earlier than peers.

Growth differentials continue to be primary drivers of FX price action, best evidenced by AUDUSD and NZDUSD trading at multi-year highs as their economies lead G10 peers in their respective recoveries.

However, with Covid-19 cases remaining elevated in other G10 nations, the easing of lockdown conditions has stalled of late. This has placed the emphasis on the distribution of vaccines and effectiveness of lockdown measures in driving down case count. In this regard, the UK has flourished. Since the imposition of the lockdown measures back in early January, new cases in the UK have fallen to levels not seen since October, while the government’s aggressive vaccination programme has resulted in the most vulnerable 16m in society already receiving their first jab at a minimum. These results have built expectations that Prime Minister Boris Johnson will announce a timeline for the economy to reopen on Monday, with each stage of easing conditional on certain data targets being achieved.

Throughout the week, PM Johnson has outlined the government’s cautious stance on reopening the economy, with the intention of making the easing of measures irreversible.

Despite the level of caution being voiced by officials, sterling continues to push higher as markets enjoy the prospect of the economic recovery resuming in the UK and the Bank of England’s hawkish assessment being realised. The risk now is that markets may have set themselves up for disappointment on Monday should Boris Johnson’s announced plan see the reopening of the economy take longer than expected.


G10 spot returns vs GBP over the course of the week

Note: Weekly returns were calculated as of 10:00 GMT on Friday 19th February



Lockdown measures have proven effective in lowering the new case count and in turn hospitalisation rates after reaching a peak on December 29th. With high-risk groups having been vaccinated already, hospital admissions should fall at an even faster pace than cases over the next month. Over 16 million people in the UK have now received their first shot, and the government has stocked up sufficient supplies to ensure that over-50s and younger people with health conditions will receive their first shot by the end of March. The further the vaccination programme progresses, the likelier it is the pace at which people receive their first dose will drop as previously vaccinated people will now return for their second dose. However, even if the vaccination speed for first shots halves from April onwards, this would still mean the entire adult population will be vaccinated by the end of Q2, justifying the easing of lockdown measures for the UK government.

The big question now is what the reopening phase will look like. In our latest GBP outlook, we outlined expectations of a return to tier 3 restrictions by mid-March, when the most vulnerable part of the population has been vaccinated, while we expected the broader reopening of the hospitality and service sector to follow in April. Since the publication of the outlook, vaccination targets have been met and the UK seems to be on schedule to reach herd immunity. In Scotland, First Minister Nicola Sturgeon has already confirmed there will be a staggered return of schools starting with children in years one to three going back from Monday 22nd, while secondary school pupils who need to complete practical work will also be allowed to return but must socially distance. The Telegraph reported Boris Johnson’s roadmap will begin with the reopening of schools from March 8th, with hospitality businesses and non-essential retailers to follow in the weeks/months after, however, the Prime Minister is unlikely to commit to a calendar timetable as data targets will be a key indicator for the exit strategy. Chances are high some businesses may still not be open until after the final date of the Job Retention Scheme that currently runs until March 31st. A senior Whitehall source stated that “for any significant relaxation of lockdown, household mixing and reopening of pubs, case numbers have to be in the hundreds, not thousands”. However, once vaccinations have progressed far enough that a relaxation of measures would not lead to a significant uptick in hospitalisations, one may argue higher case counts reduce in significance.

As Johnson stated, the reopening should be sustainable enough to be irreversible, indicating that in his address to the nation on Monday evening, his tone will likely remain highly cautious.


UK ticks off initial vaccination targets and is on schedule to reach herd immunity



Sterling continues to trade very much on the here and now, reflected in its limited reaction to Friday’s retail sales data, suggesting that Tuesday’s ILO unemployment rate for December is unlikely to move the needle in currency markets as the government’s announcement on Monday is likely to dominate price action.

However, with the budget set to be announced on March 3rd, the upcoming data release is likely to have further reaching consequences than the price of the pound.

The unemployment rate is set to rise in December from 5% to 5.1%, largely reflecting the three-month average encompassing more of the effects of the government’s late extension of the Job Retention Scheme back in October. The government’s late reaction resulted in businesses going ahead with job cuts prior to the extension of the furlough scheme, which has placed upward pressure on the unemployment rate. With the latest measure now also including the effect of November’s one-month lockdown and the tightening of tiered measures in December, the minor increase in the unemployment rate that is expected comes as no surprise. However, any upwards surprise will undoubtedly place additional pressure on the UK Treasury. Chancellor Rishi Sunak has already come under fire to announce an extension in the UK’s furlough scheme at the upcoming budget, with the Institute for Fiscal Studies joining the CBI and Chamber of Commerce in calling for sustained labour market support. The leading think tank on the public finances said that despite record sums being borrowed since the pandemic, the multibillion pound scheme should be phased out in line with the slow reopening of the economy, while the £20-a-week increase in universal credit payments should be maintained indefinitely. Analysts will focus on the upcoming labour market data along with the government’s announcement to judge their expectations for the March budget accordingly. The combination of the events is likely to shape growth projections for the coming months.




The Reserve Bank of New Zealand’s next policy decision is due on Wednesday 24th with no relevant moves expected by analysts nor market participants. While markets have compounded expectations that additional rate cuts are no longer likely and that the RBNZ should maintain a rather passive role this year, prominent issues do remain on the Bank´s agenda. On the one hand, New Zealand is experiencing rising inflation expectations despite slack still present in the labour market, which poses the risk of an earlier-than-expected hiking cycle. On the other hand, concerns remain over loose monetary policy stoking the housing market and presenting both financial and monetary stability problems, even though the Bank distanced itself from the underlying political matter.

Investors will closely follow details on both issues next week, which carry a high potential of affecting the kiwi dollar.

Recent positive data surprises in New Zealand’s inflation reports have led to growing expectations that the RBNZ will need to tighten monetary policy ahead of their signalled timeframe. Forward swap rates for the one-year horizon suggest investors are already pricing an increasing probability that the cash rate will rise in the near-term, while expectations in neighbouring Australia remain anchored over the same horizon after the RBA committed to holding rates until 2024. Headline CPI inflation in Q4 printed 30 basis points higher than projected by the RBNZ in November, with a 1.4% growth rate on a yearly basis. Even though the move was mainly attributed to higher prices on discretionary items, measures of core inflation were generally higher as well, nearing the midpoint of the target band. As with previous quarters, distortions from methodological issues brought about by restrictions during the pandemic are set to be accounted for by the RBNZ. This means that volatility in the inflation data is likely to be ignored during the first half of 2021 by the central bank as it focuses on real activity and labour market indicators instead. Even so, data surrounding economic activity has improved since November’s Monetary Policy Statement. The drop in the unemployment rate in Q4 to 4.9% was greater than expected, while the employment-to-population ratio also rebounded to near record highs. Meanwhile, leading indicators such as hiring intentions and business sentiment indices suggest New Zealand’s labour market will continue to tighten over the coming months as the economic recovery continues. The policy implication from these data points tilts the risks towards the hawkish side for the RBNZ’s communication, although they are likely to maintain their cautiously optimistic view on the recovery while referencing downside risks.


Markets are pricing the odds of rate hikes in New Zealand earlier than in Australia

A far more pressing concern for the RBNZ is rising house prices and the central bank’s role in it. New Zealand house prices continued to soar in January, rising 12.8% from a year earlier – the fastest pace of house price growth since March 2017. The easing in monetary policy in response to the pandemic pushed one-year fixed mortgage rates down by 200bps to three-year lows. While this increased demand pressures on New Zealand’s housing market, the Bank refused to acknowledge house prices as a formal goal of monetary policy. However, with risks poised towards earlier than expected rate hikes from the RBNZ already, an overheating housing sector places increased pressure on headline inflation and adds to market expectations of higher rates. The situation is so severe that it has already called for action from the RBNZ, which announced on February 9th that as of March 1st, the high loan-to-value ratio on lending limits lifted in May will be reinstated. The government is also set to address the matter of the housing market, revising tax policy on property investment and rental expense deductions. Based on this dual action, market participants will be expecting a slower forecast of house prices growth in the RBNZ presentation next week, but the issue holds potential for influencing monetary policy decisions looking forward if the current measures fail to cool down a hot housing market.


Simon Harvey, Senior FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst



DISCLAIMER: This information has been prepared by Monex Canada Inc., an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Canada Inc., or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.