December 2020

Good morning, Last week volatility increased sharply in sterling related markets as once again Brexit dominated the headlines and airwaves. With this weekend’s talks spilling over into this week, a renewed sense of optimism returned. Sterling has bounced strongly off its lows as a no-deal outcome seemingly has receded slightly.

After a week where a no-deal loomed, we now have another two possible outcomes, either a deal at the death or a possible extension beyond the 31st December. With so many imponderables and personalities at play, the rumour mill will no doubt be working over-time. Sterling will remain highly volatile, and thin markets will heighten it as we enter into the Christmas period.

Away from Brexit, our focus will be on Central banks over the next few days. Last week the ECB increased the length of its monetary accommodation into the first half of 2022. By doing this, they are hoping that their policies can act as a bridge till vaccines have restored some sense of normality to the Eurozone economies. This coming Wednesday, we will get to see how the Federal Reserve is planning to react to the rising tide of both COVID-19 and unemployment in the United States. On Thursday it will be the Bank of England’s last chance to change policy before the year-end.

After the weekend’s talks seemingly ended in a score draw, we enter the last full week of trading still unsure of the trade negotiation outcome. After a weekend where sterling moved by over 1% back to £1.3325 and thin trading in prospect, we again expect to see highly volatile markets. Away from Brexit, we have quite a busy data docket. The latest Unemployment data will be released tomorrow, Inflation figures for November on Wednesday and Retail Sales on Friday. The most important event will be on Thursday when the Bank of England will hold its last regular policy meeting of the year. This meeting falls just a fortnight ahead of the year-end when we could still find the UK ending its transition out of the European Union without a future trade deal. The BoE is likely to leave both rates and QE (Quantitative Easing policies) as they are this month. Governor Andrew Bailey has hinted at a move to negative interest rates, but this is unlikely. If the BoE decides to move rates into negative territory sterling would decline sharply.

Euro

The euro is of course affected by the Brexit uncertainty every bit as much as sterling and has opened this morning at €1.2125. Over the weekend Germany announced a hard lockdown over the Christmas period and this may cap and advance by the euro. Derivative traders are also taking a negative view of the currency as the premium for puts (the right to sell euros) has been increasing. The derivative moves may be traders buying protection for year-end as demand for dollars increases. Away from waiting on Brexit headlines, we will be watching October Industrial Production today and then the first look at the December PMIs for the Eurozone, on Wednesday. The recent lockdowns have hurt the service sector more than most and analysts aren’t expecting too strong a rebound.

After last week’s weaker US payrolls number there does, at last, appear to have been progress with the discussions over a new $916bn stimulus package. Whilst these negotiations drag on there is at least the good news that a vaccination program is starting across the United States. With 2021 rapidly approaching there is potential for disruptions to the market caused by year-end rebalancing. With US stock markets having risen sharply, there could well be a demand for dollars as banks need to balance their books. Away from the repercussions of Brexit, we will be watching out for the Federal Open Market Committee meeting on Wednesday. A dovish message is expected from this meeting but with no great changes to its policy. On the US data docket, we will be keeping an eye on November Industrial Production on Tuesday, Retail Sales on Wednesday and Thursday will see the weekly release of unemployment data.

Scandi

The Swedish Krona had another volatile week against most G10 currencies. This was mainly caused by Riksbank comments about the possibility of negative interest rates in the future should they be deemed needed. It remains the best performing currency of this year within that group, and the macro data from last week was encouraging too. Inflation remains stubbornly low, but the Riksbank does not seem too worried as it tries to put out other more urgent fires. This week is relatively thin from a data perspective with the unemployment rate being the only important set of data out on Thursday. Loyal readers of our report are fully aware that December is normally SEK positive, and data compiled demonstrates that SEK has strengthened on average 1.1% between 11-Dec and 31-Dec since 2009. In other words, we have entered what should be a SEK bullish period.

Over in Norway, it looks as if the Norwegian Krone is going to claim the opposite title and be crowned the worst performing G10 currency of the year. Apart from oil, Norway’s economy is mainly driven by its high-end fishing produce. With lockdowns and restaurant closures, the industry has suffered throughout 2020. Despite that, the market is not looking for the Norges Bank to deliver any surprises on Thursday when the Deposit rate is set. It is expected to stay at 0.00%. We will also closely monitor the unemployment rate, which is out the day after.

ROW

The aussie dollar looks set to continue benefitting from the recent rise in Iron Ore prices as well as the weaker dollar, but like all beta currencies, it may suffer from the fallout from Brexit as well as its ongoing spat with China with the Australian wine industry now targeted. We will be watching its close neighbour, the kiwi when third-quarter growth data is released this week where the consensus is for a strong rebound. Their cousin, the Canadian dollar, should continue to benefit from a global rebound as Oil recovers and their inflation figures are released on Wednesday. The Swiss franc could see some volatility as the ramifications of any new Brexit negotiations are felt. The Swiss National Bank will as always will be watching from the sidelines and will not be afraid to intervene to maintain an orderly market.

Good Morning, after weeks of the markets being dominated by three stories, President Trump, Brexit and COVID-19, it seems like we are at last reaching the end game in two of them.

President Trump has all but conceded defeat to Joe Biden.

The markets are now anticipating what a Biden presidency is going to be like and the Brexit negotiations, famous last words, look like they are in the final furlong. COVID-19, however, is still tearing its way through much of the world with America reaching record hospital admissions; however, on this side of the Atlantic, it is starting to look more containable. The great news in the last week was, of course, the upcoming availability of a vaccine against the virus in the UK. Widespread inoculation will help life return to normal quicker than possibly anticipated and hopefully give us a head start on the road to full economic recovery.   Over the weekend, Boris Johnson and Ursula von der Leyen had a one-hour phone conversation which has led to the two negotiating teams returning to the table. It did emerge from the call that the same three issues, fishing rights, a level playing field and dispute resolution are still no closer to being solved. With President Macron facing an election next year, it is no surprise that he is playing tough over fishing, partly as much of the French trawler fleet is in areas where his support is weak. This week we will find out whether it’s all just bluff and bluster from politicians on both sides of the Channel. The euro has been enjoying a stellar run against the dollar as sterling has, but if there is a genuine breakdown in talks, both currencies will drop sharply. Away from Brexit, we will be watching out to see if the dollar can recover from its recent weakness and what the ECB are up to on a European super Thursday.

GBP

Over the last week, sterling appreciated against the dollar due mainly to dollar weakness but also on optimism of a Brexit trade deal. It gained almost two cents at one point touching the high of $1.3515, which was a level we last saw after December 2019’s election. A recent market survey reported that most participants were expecting a Brexit trade deal in one form or another. Still, it only managed a modest move against the euro over the week and has opened weaker at €1.1060 this morning. With the trade negotiations on a knife-edge, we are expecting an extremely volatile week for sterling as we enter what really is now the end game. With institutions seemingly committed to a positive outcome, we think the risks to sterling are more to the downside as either a thin deal or no deal now looks most likely. It’s a quiet week on the data docket in the UK this week with just October’s Industrial and Manufacturing figures and GDP on Thursday for us to digest.

Euro

Looking away from Brexit this week the euro will be dominated by “Super Thursday” when not only is there an ECB meeting but also an EU leaders’ summit. Alongside Brexit, another problem the leaders face is getting the Recovery Fund approved. Last week, the markets chose to ignore Poland and Hungary’s protestations over the fund taking the view that, as is often the case, Europe will find a fudge. The question remains whether the leaders can find a solution as well as whether they can agree on any possible Brexit trade deal. We will also be watching for further stimulus from the European Central Bank and listening closely as no doubt President Lagarde tries to talk the euro down on Thursday. With suggestions that China and Switzerland are needing to rebalance their reserves by buying euros, this may be a thankless task. On a quiet data docket, we have the results of the ZEW sentiment surveys on Tuesday to look forward to as well as the Eurozone Gross Domestic Product (GDP) figures, and we will be studying November’s German Consumer Prices on Friday.

The dollar slumped to its lowest level against the euro for nearly three years last week, as the single currency traded comfortably around the $1.2150 level. Non-Farm payroll data last Friday was disappointing and with over one million cases of COVID-19 over the last five days, the US economy will continue stuttering causing the dollar to slip. With the election receding into the memory, attention is turning towards the chances of agreement over the much-needed stimulus. With a lame-duck administration until the swearing-in of the new President next January hopefully, there will be a chance of some political compromise. There is very little data out this week for the market to fret over, apart from November’s inflation numbers and Initial Jobless claims on Thursday. Also, on Thursday, we will be watching to see if the Food and Drug Administration approves the Pfizer/BioNTech vaccine when it meets.

Scandi

What should have been the start of what is usually the strongest period for SEK has been quite the opposite. The Swedish currency remains under pressure against the EUR with stricter COVID-19 restrictions, internal fighting within the fragile Social-Left-Green-party coalition and the world’s oldest central bank taking action, which surprised all market participants just before month-end. Albeit December has just begun, 2020 has once more proven to be the year of surprises, and we will closely monitor all macro developments. This week we will pay extra attention to the Budget Balance, which is out alongside the latest Industrial Orders figures and Swedish Housing price data. The important CPI (inflation) figure is out on Thursday, together with the latest Household Consumption data. Last week’s biggest headline from Norway was the resignation of the Deputy Governor of Norges Bank, due to a potential conflict of interest which arose partly because of his marriage to a Chinese citizen for which he was denied security clearance to continue his job. Nicolaisen had also overseen overseeing the world largest sovereign wealth fund, and it is still unclear who will replace him. What long term impact his departure will have on NOK remains to be seen, but should it be anything like the initial reaction, then the NOK may weaken further. This week we will get the GDP figure on Wednesday and the CPI on Thursday all expected to remain static on a month-on-month basis.

ROW

With a European summit on the horizon and continued dollar weakness, we could see some upward movement in the Swiss franc this week as traders seek a safe haven in Europe. On the other side of the Atlantic, the Canadian dollar looks set to benefit from strong employment numbers as well as positivity towards Oil after the recent OPEC+ agreement. Its cousin in Australia underwhelmed last week and was amongst the worst performing currencies in the G10 which Philip Lowes speech this week is unlikely to change. Finally, the Japanese yen has been relatively quiet recently but, with risk appetite continuing to grow, it could start appreciating as funds flow from the US dollar.

The can is kicked down the road again

A volatile week for sterling?

Good Morning, after weeks of the markets being dominated by three stories, President Trump, Brexit and COVID-19, it seems like we are at last reaching the end game in two of them.