Post date: 18/01/2021 12:49
Markets continue to ignore steadfastly the turmoil in Washington. Neither the chaos following the assault on the US Capitol nor the sale of an enormous amount of US bonds to finance the massive federal deficit caused more than a ripple in risk markets, and the US dollar in fact took advantage of the massive short position in the market to rally strongly against most of its peers. Emerging market currencies generally held their ground rather well, as markets react belatedly to the large jump in commodity prices so far in 2021. Special mention goes to the Brazilian real, the strongest major currency in the week, buoyed by hawkish comments from Brazilian central bank. The first European Central Bank meeting in 2021 will certainly be the focus this week. Biden’s inauguration in the US will be heavily guarded and we expect no significant disruptions. The economic calendar is generally light, so we may see renewed focus on the evolution of COVID caseloads and vaccination numbers.
Sterling was one of the few major currencies that managed to end the week flat against the US dollar, but this was mostly a bounce back from its very weak performance the week prior. Worries about Brexit have been replaced for now by a focus on the speed of vaccinations, where the UK is putting in the best performance among major countries. Britain has now administered at least one jab or either the Pfizer or AstraZeneca vaccine to more than 6% of the population – more than three times the amount of any other country in the Euro Area.
UK data lately has been better-than-expected, in spite of the harsh lockdowns. We think there is room for these positive surprises to extend into the first quarter of 2021 and retain a positive bias on the pound as these levels.
The euro spent a data-light week retracing its recent push higher against the US dollar. Focus now shifts to the ECB meeting on Thursday. While no policy changes are expected, communications from President Lagarde will be scrutinised. Two issuers in particular will be front and center. First, the impact of the extended lockdowns on the prospects for growth last quarter and this one. Second, the sharp rise in the euro over the same period. There is a chance that Lagarde could again talk up the bank’s aversion to a stronger currency, as she did in December, which may provide a bit of a downside risk to the euro. Aside from the meeting, the release of the bank lending survey on Tuesday will be the most important forward-looking release in the Eurozone.
Somewhat paradoxically, the stabilisation of US treasury yields after the relentless risk of the past few weeks brought some rest bite to the dollar. The US managed to place an enormous $120 billion of Treasury bonds in just one week, yet Treasury rates ended the week lower across the curve, in a sign of confidence in US institutions and the Biden administrations in spite of the recent turmoil. Biden last week unveiled plans for a $1.9 trillion fiscal stimulus package, including plans to extend additional unemployment insurance benefits through to September. Elsewhere, we are getting mixed signals from jobless claims (weak) industrial production (strong) and inflation (slightly higher than expected). We think the recent rebound in the US dollar has some room to run, but we remain bearish on the greenback longer term.