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Daily Currency Update

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Market Firmly Convinced of the Dollar Decline

USD: Markets look to be firmly convinced of the dollar decline and risk events (be it the “Blue Wave” and prior concerns about more regulation and tax increases, or the recent events in Washington) don’t appear to be strong enough to alter this view. The mix of rising inflation expectations and a cautious Federal Reserve (which will in turn translate into a further decline in real rates) is to weigh on USD as the global economy recovers after the tough winter months. On the data front, the focus today is on the December US labour market report. Any positive nonfarm payroll figure should be considered a good outcome as both home base and ISM services point to a fall. But even if negative, this is unlikely to affect markets too much as any fall will be seen as temporary (Covid related) with the focus remaining on the vaccine rollout and the upcoming fiscal stimulus.

CAD: While crude oil prices are maintaining $50+ levels and US equity futures are trading positively, the CAD’s rally stalled yesterday, and the currency has slipped modestly through the overnight session. The CAD remains more or less fairly valued by our metrics at the moment. There are no grounds to expect a significant decline in the CAD at the moment, in other words, but the broader USD trend may well exert some moderate pressure on the currency in the short run. Canada releases employment data this morning but we expect little major impact from the data and the general tone of markets overall to define the near-term direction of spot.

EUR: The likely uninspiring US labour market report today should have a limited impact on EUR/USD. Based on our short-term financial fair value model, EUR/USD does not appear stretched (being only mildly overvalued and comfortably within its 1.5 standard deviation band) despite its rise over recent months. This suggests more scope for an unconstrained rise in EUR/USD as USD weakness continues.

GBP: Only limited upside potential vs the euro. EUR/GBP remains above the 0.90 level as the build-up of rate cut expectations (following the third lockdown) offsets the positive effect of the UK-EU trade deal. While we still see room for EUR/GBP to mildly drop below the 0.9000 level, this should be limited given the rising risk of further Bank of England easing, while GBP is to benefit less from the conducive global risk environment in comparison to its European peers.

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