USD: The dollar has remained generally supported in early trading today as markets await new catalysts in the form of data releases or political developments in the US. On the latter, Vice President Mike Pence has pledged to keep working with President Trump until the end of his mandate, therefore refusing to remove Trump from office through the 25th Amendment. This means that the Democrats will have to go through Congress for the impeachment process. For now, markets have not shown a high sensitivity to the recent political turmoil in the US and with only eight days before Biden’s inauguration, it appears the effective implications of a successful Trump impeachment may be limited from a market perspective. Looking at the US calendar, the December NFIB Small Business Optimism will be released today and will be followed by a plethora of Federal Reserve speakers later in the day. With the Fed’s rate expectations at rock bottom, any further rise in US yields will remain a function of rising inflation expectations which leaves us confident on a bearish dollar call.
CAD: Canadian economy not a hindrance to further CAD gains. A surprisingly upbeat tone emerged in the Bank of Canada's Business Outlook yesterday, but this was mostly due to vaccine-related optimism and masked the struggles of the Canadian economy shown in Friday’s jobs report. That said, Canada is not a negative standout in the global recovery story, leaving CAD with further room to appreciate. There remains an outside chance that the USD/CAD dropping below the psychological 1.25 level in the coming months.
EUR: The EUR is experiencing a lack of idiosyncratic drivers early in the week ahead of some central bank activity tomorrow (ECB President Christine Lagarde participating in a Q&A) and on Thursday (ECB minutes). Despite having been a background story so far, recent Italian political noise may intensify in the next 48 hours as former Prime Minister Matteo Renzi’s party may pull support from the government. Any significant market reaction emerging in a widening BTP-Bund spread (currently at the lowest in five years) bears downside risks for the EUR.
GBP: Is showing tentative signs of recovery despite the decent USD momentum after a weak start to the year. We maintain a rather optimistic near-term stance on GBP considering that the majority of bad news appears to be already in the price. Also, we remain reluctant to forecast negative rates by the Bank of England. In this regard, keep an eye on BoE’s Deputy Governor Ben Broadbent speech this morning.
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