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Biden’s $2TN Plan Steepens US Yield Curve

USD: US yields are back on the rise following a media report that claimed Biden’s pandemic relief stimulus will likely be around $2tn – bigger than what most investors were forecasting – and will include direct payments to families, state and local funding. This has further endorsed the recent rise in inflation expectations and hopes of economic recovery which has prompted a re-steepening in US yield curve. Despite the dollar staying mildly supported in the current environment, the negative implications in the longer-run in a real-rate perspective leaves us confident about our bearish-USD view. Data-wise, initial jobless claims look set to rise again after slightly contracting last week. Meanwhile, political developments involving President Trump continue to be largely overlooked by investors. Trump’s second impeachment by the House on claims that he incited the Capitol riots was not a surprise, but an emergency Senate session for the trial before Biden’s inauguration appears unlikely.

CAD: The CAD remains relatively stable despite slightly firmer crude oil prices and the positive tone for stock markets broadly. The CAD’s inability to reflect these positive impulses—at least right now—reflects the broader bid for the USD. Local election speculation continues to simmer, following yesterday’s news of a minor cabinet reshuffle by PM Trudeau; given the COVID-19 situation, renewed lockdown measures across the country and the slow roll out of vaccines—at the very least, the risk of a snap vote has to be extremely low at least until much later in the year.

EUR: The Italian government plunged into a crisis yesterday after a small party of the ruling coalition – Italia Viva – withdrew their support. From a market perspective, there is only a limited risk of a material widening in the BTP-Bund spread which is set to keep benefitting from the ECB’s heavy purchases. Accordingly, the spillover in FX should continue to be limited. Looking at today’s calendar, the ECB December minutes stand out. Considering the virus situation in Europe has materially worsened since the meeting, investors will likely seek indications about the Bank’s policy plans in a more pessimistic scenario.

GBP: Is outperforming the majority of its key peers by virtue of holding unchanged on the day after a couple of tests of the 1.37 mark in the early hours as markets trim BoE rate cut bets. The UK announced that it will begin ‘financial equivalence’ talks with the EU this week after the Brexit agreement reached in late-Dec left out a key component of EU-UK relations. Today’s run of stale Nov GDP and industry output data should have little impact on the pound.

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