USD: Broader trade weighted measures of the dollar are about 1.3% above the low of the year made in early January. As the ECB noted in the minutes of its January policy meeting yesterday, US real rates had been seen as a ‘key factor driving global portfolio rebalancing and risk-taking’ and that a rise in real rates could see recent FX trends (weaker dollar) lose steam. Looking at the 5-year sector of the USD swaps markets, 5-year US real rates have risen about 20bp over the last 10 days. This in part has been driven by the stronger US retail sales and the view that an extra US$1.9bn of fiscal stimulus (likely approved mid-March) could be too much. It looks to be a quiet end to the week in FX markets – look out for existing home sales and Fed speaker Rosengren and Barkin today – with the next big event on the horizon being Fed Powell’s semi-annual testimony to the Senate next Tuesday.
CAD: Is trading a little softer against the USD so far today but it is a relative out-performer among the major commodity currencies. At the margin, Canada’s management of the virus and a slight turn up in domestic data surprises may be granting the CAD a little support beyond the USD but risk sentiment remains the primary driver of the CAD at the moment— and seems poised to remain so for now. Retail Sales will be released this morning and is likely to drive direction today.
EUR: Minutes of January’s ECB meeting did not express too much concern over a strong EUR – perhaps because EUR/USD had gone into corrective mode. EUR/USD bulls could take comfort though in a remark that ‘it was also highlighted that the impact of exchange rate movements on inflation might be overestimated in standard models’. In the short term expect the EUR/USD to drift in the 1.20-1.22 area.
GBP: FX and rates markets have been dominating over the past week, with Gilt yields dragging European yields higher and GBP probably providing support to EUR/USD. With equity investors still underweight UK equities, we see this rotation into the UK and GBP having further to run.
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