FX

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.

The can is kicked down the road again

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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.

UK

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.

US

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.

Autumn storms ahead

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Good Morning, as the world’s markets waited all last week for the release of the Non-Farm payrolls data only for more serious news to partly side-line the event with the announcement that President Trump and his wife Melania had tested positive for COVID-19.

The markets knee jerk reaction was a flight to safety which benefitted the dollar, yen and to a lesser extent the euro.

The health of the President and its effect on the forthcoming election, now under 30 days away, will certainly dominate the headlines and the markets over the next week and for some time after. The markets will also remain fretful that other members of his administration could fall victim to the virus, especially Vice-President Mike Pence.

When the employment numbers were released and digested, they were somewhat underwhelming and served to underline that the recovery in the US is stalling and the need for a fiscal stimulus package to be delivered sooner rather than later. Unfortunately, the combination of the President’s illness and the forthcoming election makes the agreement of a stimulus package further away than ever. Looking ahead to Thursday the markets will focus on increased interest on the Vice-Presidential debates. The market is likely to continue to be volatile and with China on holiday all week, volumes will be thinner which in turn will exaggerate moves. Closer to home it will continue to be all about Brexit. After Boris Johnson’s Saturday call with Ursula von der Leyen, they both said that significant differences still exist and that both sides need to intensify efforts to find solutions. As the Brexit clock ticks ever louder the efforts of both sides to find a solution will dominate domestic news.

UK

Sterling had a good week making gains over the dollar to close above $1.2900 and on the euro where it settled €1.1000. So far sterling has stayed immune to the recent outbreaks of COVID-19 and traders’ attention has instead been concentrated on the chances of a Brexit trade deal. The coming week will be dominated by Brexit and after Saturday’s call between the leaders yielded little movement sellers may reappear.  Also as a beta currency sterling is vulnerable to the buffeting caused by changes in risk assessment.  The data docket looks a little bare in the week ahead with only August’s Gross Domestic Product and Manufacturing production being released on Friday.

Euro

With COVID-19 infections creeping up, the lack of agreement on the recovery fund is starting to concern traders and will continue to do so unless these concerns are addressed. However, these worries were side-lined as the euro benefitted from its safe-haven status as a risk-off mood returned to the markets and with President Trump in hospital this is set to continue. Retail sales are released later this morning and after these figures the economic calendar is light but there is a European Finance ministers meeting on Tuesday and a selection of speakers from the ECB during the week including Christine Lagarde twice on Wednesday. The drop in inflation may be starting to worry the ECB and the release of the minutes of their early September meeting may give a clue to how they are thinking about further stimulus.

US

The focus, of course, will be on the President’s health in the coming week and the shifts in risk sentiment associated with it. There was a rise in the Vix index last week, often known as the fear index, and the market was already bracing itself for heightened volatility ahead of the announcement of Donald Trump’s illness.  After the disappointment of the jobs report last Friday the market will turn its attention back to Fed this week with Fed Chairman Jerome Powell delivering a speech on Tuesday and the release of September’s FOMC meeting notes on Wednesday. Very little else of any importance is released apart from ISM services data today and the weekly employment figures on Thursday.

Scandi

Last week it was confirmed what many had feared: Swedes spent and shopped less which meant that retail sales contracted by 0.3% on a month-by-month basis. However, there was some light seen at the end of the tunnel when PMI Manufacturing data which came in showing that manufacturing activity had expanded. The krona remains rangebound and still cannot return to the levels it traded at during the summer against all major crosses. This week we are watching the industrial orders, the budget balance, and Swedish Housing Price Data. Any further mention of lockdowns will naturally grab our and the market’s attention. The Norwegian krone is still under pressure and this week the market will be watching out for the GDP figure and the latest inflation figures released on Friday which are expected to be well above most other major economies at 2%.

ROW
The Reserve Bank of Australia meets this week and more dovish rhetoric is expected, but this is likely to pale into insignificance when seen in the light of the likely shifts in global risk sentiment. Its near-neighbour the kiwi is also a hostage to global risk movements although it does have its own election looming on 17th October. The main beneficiary of uncertainty over both the US election and President Trump’s illness will most likely be the Japanese yen which looks set to strengthen whilst the Canadian dollar could suffer if its payroll number, released on Friday, is worse than anticipated and oil continues to weaken.

Question
What is the FOMC?
The Federal Open Market Committee (FOMC) consists of twelve members – the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. By law, the Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of maximum employment and stable prices. FOMC announcements inform the world about the US Federal Reserve’s decision on interest rates and are one of the most anticipated events on the economic calendar as are the detailed minutes of the meetings which are released about two weeks after.

Have a great week,

Synergy Exchange