Post date: 06/04/2021 12:34

In a holiday-shortened trading week risk assets continued to rally, led by US stocks, seemingly ignoring the clear upward trend in global rates. A strong payrolls report out of the US was no help to the dollar, which sold-off against every other G10 currency. Emerging market currencies joined in the party, led by the Turkish lira, although nearly every major one managed to post gains of more than 1% for the week.

We expect the positive tone in financial markets to remain in place for quite a while yet. The combination of zero or negative rates in developed markets, a storm of fiscal support hitting domestic economics, and clear though uneven progress in the vaccination front should keep risk assets well supported while bonds continue to fall, particularly in the US. We are particularly positive on emerging market currencies, which are both cheap and well placed to capitalise on the current environment.


Sterling outperformed every other G10 currency and a few emerging market ones last week. In addition to the strong vaccination rollout there was a modest upward revision to the growth numbers for last year. The current risk-seeking environment is proving a boom for the pound, which has now recovered all of its pandemic losses against the euro and quite a bit more than that against the US dollar. This will be a shortened trading week and there are no significant UK data releases or policy decisions, so we expect sterling to continue following the path of least resistance upwards.


The main news last week was a disappointing print in March inflation that saw the core figure (excluding volatile items) pull back to 0.9% on the year. It is clear that the fresh wave of lockdowns is restricting consumption and delaying any onset of inflationary pressures in the Eurozone. The highlight for this week will be the release of the ECB meeting minutes and industrial production numbers out of Germany, France and Spain, which should be reasonably strong as the manufacturing sector is less affected by the lockdowns. The impact on currency markets should be limited, however.


The successful vaccination rollout in the US and the progressive easing of the COVID restrictions is impacting the economy faster than predicted. The payrolls report for March was much stronger than expected. The US economy restored a net 916,000 jobs in the month, much higher than consensus and the strongest month of net job creation since August. With the enormous stimulus package still to hit and a new infrastructure package on the horizon, economists are busy bringing their estimates for a full recovery from the pandemic forward in time. We think it is noteworthy that the dollar is not rallying and actually trending modestly lower in spite of rising US yields and a barrage of positive economic news.