Battle of the bonds


Good Morning, tomorrow marks a year to the day since the UK population was told to stay home, and the first lockdown began. The currency markets (including bonds) are still being driven by the same fears and worries of the economic fallout from that decision.

After a year of often false starts, investors are now watching vaccination levels and their effect on the speed of recovery across the world.

Simultaneously several European countries are re-entering into lockdowns as they battle a third wave of the pandemic. In the last week, we heard how the major central banks are planning to respond to the recovery and how tolerant they are of any upticks in inflation and subsequent rise in interest rates.

The Bank of England appears moderately relaxed towards this prospect, the European Central Bank keen to keep yields low and the US Federal Reserve the most tolerant. Investors showed that they were not as benign in their views as Chairman Jerome Powell, and they sold US bonds, pushing yields higher, unsettling risk sentiment, and strengthening the dollar.

In the week ahead, it is hard to see any significant change to this data narrative driving currencies with the third wave in Europe, adding to the pessimistic risk posture that investors are starting to adopt. For the time being, sterling, as befits a beta currency, will continue to be at the mercy of the king dollar and has opened at $1.3850 this morning. With large swathes of Europe now grinding to a halt again, including France and Germany, the euro is likely to remain under pressure, which may increase as the ECB is expected to continue to support its bond-buying programme further, effectively keeping yields low.


Sterling continues to benefit from the vaccine dividend and has been trading in a relatively tight range against the euro, opening this morning unchanged at €1.1650. As yet, there is scant evidence of a third wave of COVID-19 remerging, which should continue to favour the pound against the single currency, as will the outflows of global capital from Europe that HSBC reported last week. We have a full data docket to digest this week, but after the last Bank of England meeting, it would be surprising if there was a significant change in sentiment caused by any of the figures. Tomorrow the January unemployment rate is released, which isn’t expected to have changed dramatically. On Wednesday, Service Purchasing Managers Indexes and the Consumer Price Index for March are released, which are both expected to show modest improvements. On Friday, February’s Retail Sales are expected to partially recover after January’s sharp fall, but they are unlikely to unsettle the markets. Bank of England Governor, Andrew Bailey, is also slated to speak on Tuesday, but it would be surprising if he added anything to last week’s thoughts.


The, at best, confused handling of the COVID-19 pandemic and the vaccination programme that has seen less than 10% of Europe inoculated looks set to continue to unsettle the euro. With France, Germany facing a third wave, rising US yields and no great advance in releasing the fiscal stimulus promised last year, problems are mounting for the single currency. Today the market will be watching to see how the ECB responds and if it increases its Bond buying programme and, in doing so, keeps downward pressure on bond yields. We have a whole week of data to digest starting on Wednesday with a first look at the March Purchasing Manager’s Indexes for the larger manufacturing countries, followed on Thursday by GfK’s take on Consumer activity in Germany. We close the week on Friday with the Ifo Business readings also for Germany. There is a European Council Meeting on Thursday which will be an opportunity for the great and the good of Europe to air their views with Isabel Schnabel scheduled to speak.


Last week’s price action in the currency markets was driven almost entirely by what the Federal Reserve said, or didn’t say, after its monthly meeting on Wednesday. In doing so, they left the bond market to its own devices, and an upward spike in yields occurred, with the closely watched 10 yr. bond touching 1.75% before easing down. The bond market has traditionally been the driving force behind all financial markets, and fears are starting to increase of them throwing a “tantrum” and selling off sharply and disrupting the stock markets, which will strengthen the dollar. The data docket is a little barren this week, with only Durable Goods released on Wednesday, the weekly jobs report on Thursday, and Personal Income and Spending data on Friday. To make up for this shortfall of data, we have six different Federal Reserve members speaking next week, with Jerome Powell speaking no less than three times.


The Swedish krona hit new 2021 lows against the euro and pound sterling last week as the inflation figure came in lower than expected, and the unemployment figure was higher at 9.7%. Whether the positive trend which started in May last year has been broken remains to be seen, especially since we are soon entering what is traditionally a krona positive period. This week we are watching the latest PPI figures out on Thursday and the Retail Sales on Friday.
The Norwegian krone ended the trading week worse than it began, thanks partly to a political faux pas by Prime Minister Solberg, who is seeking re-election in September. She broke her own government’s COVID-19 rules and attended a 60th birthday party with more attendees than the current restrictions allowed, directly affecting her lead in the polls. This week we will monitor any further potential political fall-out caused by her actions together with the unemployment rate, which is out on Friday. It is expected to have come down to 4.0%.

Have a great week!