January 2021

Vaccinations and viruses set to dominate

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Good Morning, after the fears of violent disruption to President Biden’s inauguration proved to be unfounded, the market has returned its attention to COVID-19 and the proposed stimulus package.

Sterling has so far been a beneficiary from the success of the vaccination programme’s roll-out, which is now seeing nearly 500,00 inoculated daily.

However, after Boris Johnson warned of the new strain’s virulence, the pound may start to ease back. Currency traders will be watching out for more information on this as they will the vaccination rate. The perceived wisdom is that countries that vaccinate the quickest will see their economies recover fastest. In this respect, the UK is striding ahead of the US and Europe, having vaccinated over 10% of the population.

In the week ahead we will be watching to see if Joe Biden can circumvent any filibustering attempts by the Republican party in the Senate to stall his $1.9trn stimulus package. For the man on the street, the aid is desperately needed, and if Joe Biden fails to get enough bipartisan support, the recent rise in the dollar could stall. The disappointing December Retail Sales released last Friday raised questions about the UK economy’s ability to bounce back. This week, we will get further clues about it when the latest unemployment figures are released. We will also be watching political developments in Europe, particularly Italy. The other events of note will be the “virtual Davos” meeting where we will hear most of the world’s leaders opening on COVID-19 and midweek the monthly Federal Reserve meeting, and press conference will take place.

UK

Sterling has opened strongly this morning, above $1.3700 following on from last week’s solid performance. Vaccinations are continuing apace, and as yet few problems seem to be surfacing because of Brexit. Late last Friday afternoon, the prime minister did sound a warning shot about the dangers of new variants of the virus, which may lead to a longer lockdown than anticipated. The market is now putting more emphasis on the rate of vaccinations than backwards-looking data, which is just as well after Friday’s disappointing Purchasing Managers Index (PMI) and Retail sales figures indicated that a double-dip recession is now likely. Countering this was the good news of a reduced risk of negative interest rates and a surprising uptick in inflation. In the coming week, we will be watching for the Unemployment figures tomorrow which are expected to have climbed again to above 5% despite the furlough scheme’s extension.

Euro

The euro has seemingly been defying gravity recently and has opened at $1.2150 against the dollar; however against sterling it is more restrained at €1.1250. Political problems will continue to concern investors in the single currency, with Italy’s future leadership still hanging in the balance. Inadvertently, the European Central Bank gave the single currency a nudge up with a technical adjustment to its Pandemic Emergency Purchase Programme (PEPP), which was taken as a hawkish move by market observers. There are plenty of speakers to occupy the market this week with the ECB’s Christine Lagarde starting the week on Monday and its chief economist Phillip Lane speaking on Wednesday. Emmanuel Macron and Angela Merkel will also get their opportunities to pass comment at the virtual Davos meeting. A full data docket awaits us as well, with Germany’s IFO Business Climate report first out this morning. Then we wait until Thursday for the next meaningful figures: the Eurozone Industrial and Consumer confidence readings as well as a snapshot of Germany’s inflation data. The week closes out with German GDP for the last quarter and its most recent unemployment data.

US

The celebratory parties are well and truly over for Joe Biden, and it’s down to work this week in his efforts to unite the country and control the second wave of COVID-19. Despite the Democrats’ best efforts, the Stimulus Relief bill is stalling and as it does the dollar is stuttering. The markets will be watching to see if instead of one sizeable all-encompassing bill, he decides to get relief packages passed in piecemeal stages. As elsewhere, the vaccination rate will be studied, as will the take-up level, as economists try and read the economic recovery pace. We also have a busy data docket to look forward to starting with Consumer Confidence tomorrow. Durable Goods orders follow this on Wednesday, and the Federal Reserve holds its first meeting of the Biden era on Wednesday followed by Jerome Powell’s press conference. It is expected he will increase pressure for more stimulus and reassure the markets of the Fed’s willingness to act. Thursday sees preliminary 4th quarter GDP and Jobless claims, and we close out the week with Personal Income and Consumption data.

Scandi

The Swedish krona was rangebound last week in what was a tranquil week despite comments from Riksbank official Jansson saying that interest rates can drop down to negative in the future. The muted response from the market is being viewed as positive, and the recent bull run may continue. The border between Norway and Sweden was shut on Sunday by Swedish authorities as the increasing number of mutated viruses started escalating in bordering Norwegian towns. This week we will keep a close eye the inflation figure out on Tuesday and the trade balance on Wednesday. The official unemployment figure for December is out on Thursday together with the Christmas retail sales. Swedish retail consumption is expected to have decreased by 1% compared to a year ago.
The Norges Bank kept its interest rate unchanged but once again cautioned the market that it may be positioned too short. Speculation in the financial press is now rife that Norway will be the first G10 currency country to raise interest rates. The mutated virus is now spreading in Norway and Oslo has gone into a full lockdown, again. This week we pay extra attention to the unemployment rate, which is out on Friday. It is expected to have increased to 4.3% from 3.8%.

 

The world focuses on Washington

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Good Morning, one event above all else will dominate the headlines this week, the inauguration of the 46th President of the United States, Joseph Robinette Biden Jnr.

With large numbers of the National Guard deployed in possibly the tightest security ever witnessed for the event, we hope that the authority’s precautions deter the feared violent protests.

Last week we got a glimpse of his plans for a substantial stimulus totalling nearly $2tln. How quickly the new President can pass this will be down to how accommodating the defeated Republicans chose to be. Whilst pleasing the markets initially, the proposed package’s size will necessitate an increase in treasury bond issuance to fund the plans. Treasury yields have started to reflect this fact and have been increasing recently. The risk-off sentiment is beginning to grow, and as it does so will the attraction of safe havens such as the dollar.

Politics are also starting to influence the euro’s direction with the continent looking suddenly less stable. Italy’s coalition conflict is now looking likely to end with a confidence vote in Prime Minister Giuseppe Conte, Mark Rutte’s government in The Netherlands has resigned and further North in Denmark an impeachment trial is likely. In Germany, the Christian Democratic Union party has chosen a successor to Angela Merkel, and Armin Laschet will now lead the party to the General Election in September. When combined, these individual factors are starting to spread a little uncertainty about the bloc’s unity.  Vying for headline space will be the continued advance of COVID-19 and the introduction of stricter lockdown measures, particularly in France, Italy and Germany and the slowness of the vaccination programme in Europe.

UK

Sterling was the best performing G10 currency last week, not something that occurs too often. It has opened this morning easier against the dollar at $1.3570, but it is still trading strongly against the euro at €1.1235. For once, the UK looks relatively stable politically, and its vaccination rollout programme’s efficiency is helping sterling find buyers. The pound was also supported by Andrew Bailey, Governor of the Bank of England, all but dismissing the prospect of sub-zero interest rates despite his deputy  Tenreyro arguing that they were possible. In the coming week, we will get to see a snapshot of inflationary pressure, if any, when the Consumer Price Index is released on Wednesday. We will see how the consumer acted over the Christmas period when December’s Retail Sales are issued on Friday. Also, on Friday, Markit will release its preliminary figures for the Purchasing Manager’s Index. BoE Governor Andrew Bailey is giving a speech later today, and his Chief Economist Andy Haldane is speaking tomorrow.

US

Away from the pomp and ceremony of Wednesday’s inauguration more mundane problems will be occupying the financial markets this week. After a week of disappointing data that culminated with December’s Retail Sales dropping by more than expected and containing downward revisions for previous months, sentiment has become more risk-averse. The dollar may find buyers as a safe haven if Iran continues to test the new President’s resolve. Its a Bank Holiday in the US  today celebrating  Martin Luther King’s Birthday. This week’s critical data will again be the weekly jobless claims on Thursday, and we will also be watching out for the release of US housing data during the week.

Euro

Some political instability is creeping into Europe; consequently, the euro has been slipping and is now trading at 1.2075. Also encouraging selling pressure were the minutes from the previous ECB meeting in December, which highlighted concerns about a strong euro and its effect on inflation. The week ahead is a busy one for data and more importantly meetings. We start the week with Germany’s Consumer Price Index tomorrow and the ZEW Economic sentiment surveys. On Wednesday, the European Consumer Price Index is released as is the German Producer Price Index. The week closes out with the Markit Purchasing Managers Indices for the European constituent countries and the zone as an entity. It is also a big week politically starting today with the Eurogroup meeting. The European Central Bank meets on Thursday after which its President Christine Lagarde will give a press conference. There is also plenty to anticipate from the EU Leaders summit meeting on Wednesday when it is expected they will focus on the speeding up the vaccination roll out and implementing the recovery fund.

Scandi

The Swedish Krona’s latest bull run has not escaped the hawkish eyes of Riksbank Governor Ingves. The Swedish Krona, which until recently has been on the long and winding road back to levels last seen in 2018 weakened spectacularly after the Riksbank suddenly announced that it intends to pay back foreign loans on behalf of the Swedish Debt Office over the next two years. They will do this by selling SEK 185bn and buying foreign reserves. The financial press immediately speculated about Central Bank fx intervention, but the Riksbank later denied that. Whilst it is impossible to know for sure what is going on behind that locked door of the Riksbank, the market’s verdict spoke for itself, and it appears as if the Riksbank will have to do some more convincing. This week contains no major data releases, and we will closely monitor the movements from a more technical perspective rather than macro.

The Norwegian Krone had a quiet, rangebound week against most G10 currencies, this week’s focus will be the Deposit Rate announcement from Norges Bank. Governor Olsen is not expected to do something drastic this early on in the year. We will follow the press conference closely on Thursday as he has warned and hinted previously that the market perhaps is not taking the possibility of a rate hike before 2022 into consideration.
Although it is not something the market expects will impact the DKKEUR peg, Denmark has its first impeachment trial in almost three decades which may have wider political implications for the country.

A difficult start to the New Year

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Good Morning, the optimism that surrounded the start of the New Year quickly evaporated last week as the spread of COVID-19 worldwide started to concern the currency markets.

In the UK records of the worst type were broken as hospitalisations and mortalities both hit new records.

With another lockdown now enacted  London’s mayor, Sadiq Khan has declared a “major incident”. Concerns are now growing for the damage that the economy will suffer. With the mass vaccination programme currently underway, there is at least some light at the end of the tunnel, however tighter lockdown restrictions are being considered. Compared to mainland Europe, the UK is some way ahead of getting the population inoculated. This should help give the UK economy a head start compared to Europe when the recovery hopefully starts later this year and is lifting sterling against the euro.

Markets were also optimistic that Donald Trump would concede gracefully and leave the White House in an orderly manner. Instead, the world witnessed the turmoil in Washington, DC, last week. The market now wonders if there are any more twists in the tail to come and is becoming more risk-off. However, as much as Donald Trump dislikes the outcome, Joe Biden will be the next President, and the Democrats will control both houses making legislation easier to pass. After disappointing employment data showed that the US economy had lost another 140,000 in December, the incoming President knows that he faces plenty of economic challenges. He also has the tricky task of uniting a deeply divided nation.

UK

Sterling suffered slightly last week as Boris Johnson instigated the third lockdown on the country. Questions were also raised concerning the efficacy of the developed vaccines against the newer strains of the virus. Of course, countering the doom is the expansion of the vaccination programme, which may enable the UK to swing out of the lockdown cycle faster than its competitors. Brexit has finally dropped off the front pages, and so far, there appears to have been a smooth transition, but the market will remain cautious of sterling to see whether there is a delayed impact. This week we have another quiet week on economic data with the highlight being November’s monthly Gross Domestic Product which is released on Friday alongside Industrial Production data. This afternoon Silvana Tenreyro, from the Bank of England, will deliver a speech titled “Let’s talk about negative interest rates” which may spook the markets and pressure Andrew Bailey to respond.

Euro

Europe is facing the same problems as the rest of the world as COVID-19 case continue to increase, and containment measures grow in response. The euro has been under selling pressure as the vaccine campaign appears to have started slowly epitomised by France vaccinating less than 150,000 compared to around 2,000,000 in the UK. With the more contagious strain of the virus now reaching into the continent, a third wave is becoming a distinct possibility. After a busy start to the year on data, this week is quieter with only Eurozone Industrial Production for November due out on Wednesday. The ECB’s Christine Lagarde is speaking both this afternoon and Wednesday and the minutes from the last ECB meeting are released on Thursday. We will also be watching the German CDU convention choosing Angela Merkel’s replacement as their leader.

US

After the maelstrom of last week, we will be hoping for a quieter time this week as Donald Trump enters the last days of his Presidency. Last week, US interest rates started to rise as the Biden administration is expected to introduce reflationary policies, and a change in risk sentiment has begun to be felt. As yields rise, the dollar becomes more attractive, and over the last week, sterling eased and has opened this morning at $1.3500. A relatively quiet week for data this week mainly focusing on what the US consumer has been doing. December Consumer Price (CPI) figures are out on Wednesday, and Retail Sales will be released on Thursday which is expected to disappoint. Google mobility data suggests people traffic in retail areas has been slow which infers less gift buying over the Christmas period. Several Federal Reserve members are speaking this week including Jerome Powell, Chairman of the Federal Reserve, on Thursday.

Scandi

The Swedish krona was rangebound last week and the shorter working week meant that liquidity was very thin. This week is the first official week back at work, and new COVID-19 related restrictions have come into force, including face masks during rush hour on public transport and fines for anyone hosting a private event of more than eight people. The week kicks off with Swedish Housing Figures and the Budget Balance. Later in the week on Thursday we will get the Unemployment Rate, and on Friday the CPI figures are released. Inflation is expected to come in at 0.6% on a month-on-month basis.

The Norwegian krone has started the year strongly, which may be more technical than macro, driven. This is because Norway’s two major industries (oil and fishing) are still suffering from lockdowns and the absence of leisure and business travel. This week we start with the CPI figure out today and GDP figure tomorrow. The latter is expected to have contracted 1.6% on a month-on-month basis. The week finishes off with the trade balance being reported.

New beginnings for Sterling

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Good Morning, first and foremost, we would like to wish all our readers a happy, peaceful, and prosperous New Year.

After the most tumultuous year in living memory, the new year starts with two of the big clouds that hung over the markets gone as the US election and Brexit are now both finally resolved. Unfortunately, the news on COVID-19 infections continues to worsen and further lockdowns seem inevitable in the UK and Europe. Hopefully, as the vaccination programme expands, these restrictions will be short-lived, and some semblance of normality will return. As we start the year, the UK, the US, and the EU start on new journeys and how quickly they adapt to the changes will influence their respective currencies as will their recoveries from the pandemic.

Both the UK and the EU start the year as a freshly divorced couple but facing the same challenges. The change appears to have been seamless so far, but it is early days. After the relatively quiet markets of the last two weeks, traders return to their desks today full of vim and vigour for what looks to be an exciting start to the year with plenty of economic data to digest. The key as always will be the employment data out of the US. With the first full set of employment data for several weeks released at the back end of the week, we will see how the economy is faring as the pandemic continues across the States.

UK
After a wild ride for sterling over the last five years the coming year should hopefully be less traumatic. With the last gasp signing of a trade agreement between the UK and the EU, a semblance of normality can now return and without the ‘no-deal’ risk premium hanging over it, sterling should continue to benefit. This week we have a relatively quiet start to the year on the data docket and traders may be more interested in whether tailbacks build-up at Dover as new regulations are implemented. Today, in common with the rest of the world, we have the Markit Purchasing Manager’s Index (PMI) for manufacturing to look forward to and on Thursday Construction PMI’s.

Euro
The euro has started the year trading above the $1.22 level against the dollar, which is more of a reflection of the continuing dollar weakness, rather than euro strength. The economy is still being hit by the second wave of COVID-19 and the restrictions that it necessitates, as a result, at present the eurozone’s growth prospects are not particularly strong. Against sterling, the euro is trading near to €1.1150 as traders eye the head start that the early vaccination programme could give the UK economy. On the data front, we have quite a busy start to the year. Today the Eurozone Manufacturing PMI’s are released, on Tuesday Retail Sales and unemployment for Germany. On Wednesday Services PMI’s are released across Europe. Also released are the German Consumer Price Index (CPI) followed on Thursday by Eurozone Retail Sales and CPI. The week closes out with German Industrial Production.

US
The dollar ended the year broadly unchanged on a trade-weighted basis, but this reflects its strength at the height of the pandemic last spring, more than any renewed buying interest. With a new, probably more predictable, President soon to be inaugurated, the Treasury’s actions will now be more in focus than ever. The appointment of the internationalist, Lael Brainard, as the next US Treasury secretary should lead to a less protectionist US that should see the dollar continue to ease. We have a busy data docket to watch this week kicking off with the Institute for Supply Management (ISM) Manufacturing index on Tuesday. On Wednesday, the Markit PMIs are released as are the last FOMC minutes and the first set of Employment numbers for the month with the ADP white-collar data. These are followed on Thursday by Initial Jobless claims and ISM services data. The week closes out with the often trend-setting all-encompassing Non-Farm payroll data.

Scandi
Even though 2020 was anything but a normal year, the Swedish krona did behave as predicted and in-line with technical as well as seasonal patterns throughout December. The krona ended the year on a high note scoring its best performance and level against the EUR since February 2018 and claimed the title Best Performing G10 currency of 2020. January is historically speaking a month when the krona comes under pressure, and the gains from December are sometimes entirely wiped out. This week kicks off with the Swedbank PMI Manufacturing Survey out on Monday, and the latest figure for the Industrial Orders and Household Consumption is out on Friday. Please bear in mind that Sweden has a Bank Holiday on Tuesday for Epiphany (Three Kings Day).
What a difference a short sleigh ride across the snowy mountains makes. The Norwegian krone claimed the opposite title than the Swedish krona had bestowed upon it and officially became the worst performing G10 currency. Monday starts with the DNB PMI Manufacturing survey and Industrial Production figures are out on Friday. Norway and Demark will remain open on Wednesday.NE