Reports that President Biden is Laying the Groundwork for a $3TN Infrastructure Package may Weigh on Treasury Bonds
USD: Yesterday was an interesting day in the markets with two specific events that helped the greenback find support - (i) the Turkish lira plunged 15% before recovering half of the initial loss by the end of the trading day and (ii) the UK-EU vaccine dispute which ended the day with a more conciliatory tone from both the EU and UK after the EU threatened to curb exports of vaccines to the UK. All said, the greenback was left without any safe haven support and instead followed US Treasury yields lower. There are no market-moving data releases on the US calendar today and the focus will likely be on Fedspeak. A number of Fed speakers, including Chair Jay Powell and Treasury Secretary Janet Yellen have scheduled speeches today. Markets will be watching for any signs of increasing nervousness about the bond sell-off, and the two-year US Treasury auction. It will also be worth monitoring any retaliation from China after the US, EU, Canada and the UK imposed sanctions on Chinese individuals and one entity, citing human right violations.
CAD: The CAD weakened overnight with the pair losing about 80bps and is currently trading at 1.2580. Watch for possible BoC pushback against rates moves and CAD strength. BoC’s Deputy Governor Gravelle speaks on the role of the BoC responding to market wide stress. With markets now pricing in the largest policy tightening in G10 in Canada over a 3y horizon (almost 150bp hikes), and USDCAD having slipped <1.25 in recent days (last seen in early 2018), the BoC could start to sound dovish, pushing back against CAD strength, especially considering their forward guidance is to keep rates on hold until their inflation target is sustainably achieved which they don’t foresee until 2023. It’s a very light data week for Canada. The only calendar risk of note is tomorrow’s speech from BoC DG Gravelle who will address the role of the BoC in responding to market-wide stress.
EUR: Some dollar weakness supported EUR/USD yesterday, but the currency looks vulnerable on the back of virus-related developments. The EU-UK vaccine dispute may be heading towards a resolution, but Germany announced an extension of Covid restrictions till mid-April yesterday and a five-day circuit-breaker lockdown around Easter, all of which is set to cause a revision in market hopes around any eurozone rebound in 2Q21.
GBP: Three Bank of England officials (Governor Andrew Bailey, Deputy Governor Jon Cunliff and Chief Economist Andy Haldane) will speak today, but there should be limited risk of any surprising policy remarks considering the proximity to the latest rate announcement. Better than expected January unemployment (5.0%) figures this morning had no impact on sterling, which still appears in better shape than the euro.
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