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Daily Currency Update

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High Bar to Reverse the Dollar Bear Trend

USD: After yesterday’s US stock market decline, markets stabilized overnight, with European futures only pointing to a modest dip and the dollar being broadly down overnight. While rising Covid cases remain the key near term risk, as has been the case in the latter part of 2020, the market continues to focus on the prospects of the vaccine and the eventual global economic recovery (even if the rebound may come a little later than initially expected – particularly in Europe). All the focus today turns to the run-off elections for the two Senate seats from Georgia. The polls are narrowly favouring a Democrat victory in both seats but, given the margin of polling error, the race is in effect still neck-and-neck. While a possible Democratic victory could raise concerns about more regulation, at least over the coming months this might be outweighed by expectations of larger fiscal stimulus (which would precede possible tax hikes and regulatory measures) and thus keep risk assets supported and the dollar weak over the coming months.

CAD: The CAD is firmer this morning after yesterday’s sharp losses petered out just under 1.28. Crude oil prices have steadied and firmed a little after yesterday’s slide from near $50, sparked by OPEC+ talks breaking up without an agreement on output increases next month. The broader USD tone and risk appetite remain key drivers for the CAD at present but we do feel that the CAD’s recent gains are largely justified by background fundamentals. With spot opening up more or less mid-way between yesterday’s range extremes, spot may continue to drift in the short run until levels are more attractive for USD buyers or sellers.

EUR: Soft dollar dynamics remain the prime EUR/USD driver. With the run-off US Senate elections in Georgia ahead and the uncertainty about the outcome, the cross should remain rangebound today. Still, more upside in EUR/USD lies ahead as the Federal Reserve sticks to its average inflation targeting framework, US real rates remain negative and the current account deficit bites.

GBP: Was the worst performing G10 currency yesterday following the announcement of new lockdown measures. We expect the effect on GBP to be isolated and limited, with sterling already returning to normal trading overnight. This means GBP/USD should be pushing higher in line with the rising EUR/USD.

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