USD: The trade-weighted dollar is up just over 2% from its lows in early January. Noticeable is the softening negative correlation of the dollar with equity markets and it is hard to put a finger on what is driving this. True, US yields have been picking up slightly, but the rise in German Bund yields has matched those of US Treasuries this week. And certainly, the US vaccination roll-out looks far more impressive than that in Europe, though year-to-date gains in the US S&P 500 (+3.08%) only marginally outpace those of the Eurostoxx 50 (+2.52%). Heavy short dollar positioning probably plays a big role here and would again seem vulnerable were any part of today’s non-farm payrolls jobs data be greeted positively. Consensus looks for around a 100k gain after the 140k decline in December.
CAD: Most economists expect a second straight decline in January labour force employment, given the increased restrictions in several parts of the country. December’s decline has been revised to 52.7K and we forecast a 40K follow-up decrease in January (cons. -42.9K). Hours worked fell 0.4% m/m in December and are now 5.3% below the February 2020 level, one of several signs of slack remaining in the labour market. The unemployment rate was revised up to 8.8% for December (on a labour force participation adjustment) and we see it edging 0.1pp higher in January. In terms of the December trade report, most expect a modest gain in exports (up 1.5%) driven by a sizable increase in energy prices (which implies less of an increase in volume terms). That alongside a small decline in imports (down 0.3%) should leave the trade deficit narrower at CAD2.5 billion from CAD3.3 billion in November (cons. –CAD3.0bn). USD/CAD continues to probe trendline resistance at 1.2831.
EUR: EUR/USD has been trading heavy all week. The slow vaccine roll-out in Europe may be playing its part. Some estimates see the US reaching herd immunity with its vaccine plans by early August, while the EU may not reach that milestone until late October. Based on a target generated from a reversal pattern in USD/CHF, we would say this EUR/USD correction can run to the 1.1880 area – although we see this as a correction to a 2021 bull trend and would not expect it to spend much time down at these levels. In Europe today, the focus will be on whether Mario Draghi is able to build a new technocratic government in Italy. The Italian bond market seems to think this is a done deal, but confirmation after difficult negotiations would be welcome.
GBP: The Bank of England's strong hints that negative rates would not be used at this stage in the economic cycle triggered a substantial re-pricing in the UK money market curve and GBP. And the decisive break lower in EUR/GBP might even be partly responsible for the EUR/USD decline.
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