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Daily Currency Update

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Two Deals in One Weekend?

USD: It’s been a dismal week for the dollar and yesterday’s rally to fresh all-time highs in US equities added more pressure as investors found comfort in the prospect of a potential US stimulus deal and hopes of a faster vaccine rollout. Those factors more than offset the combination of quite concerning infection numbers (record cases in Germany, record deaths in the US) and a surprising increase in US jobless claims. Markets will remain on the lookout for more developments on the stimulus front today as bipartisan talks may yield a compromise today, although the proposal may not be ready to be approved by Congress before the weekend. It appears risk sentiment can still benefit from stimulus news, although there is a risk of a partial government shutdown over the weekend possibly pouring some cold water on the otherwise upbeat mood. Data-wise, there is nothing to highlight today. After an extended drop, we may start to see signs of short-covering in the oversold dollar as we approach the Christmas holidays, but the general bias remains firmly bearish on the dollar, especially after the reiteration of a strongly dovish and risk-friendly stance by the Federal Reserve this week.

CAD: Some rather encouraging inflation and housing figures this week have consolidated the notion that the Canadian economy is sustaining a good pace of recovery. The release of October retail sales today should have limited impact on the Canadian dollar considering the backward-looking nature of the release. CAD has been lagging other G7 currencies this week after a very strong performance in early December, but USD weakness, upbeat sentiment and strong oil momentum should continue to put a cap on USD/CAD rebounds. We could see the pair enter the Christmas holiday period from a 1.26-1.27 range.

EUR: The soft dollar environment continues to lift EUR/USD and a combination of advances on the US stimulus side and a UK-EU trade deal (which would have a positive spillover on European currencies) has the potential to push the pair into the 1.23-1.24 region over coming days.

GBP: Another Johnson-von der Leyen call yesterday evening yielded some more contradictory remarks: a deal could be agreed today or this weekend, but some significant divergences remain. The UK’s chief negotiator David Frost claimed that negotiations were blocked as of last night and Prime Minister Boris Johnson stressed the lingering disagreement on fisheries. The two parties are instead closer to an agreement on the other sticking point: the level playing field. It appears that this Sunday is the new deadline for a deal. The pound corrected from its two-year highs in early trading today but remains at levels that clearly signal lingering optimism on a deal and GBP downside risk remains asymmetrically higher in the case of no-deal. We remain of the view that a deal will eventually be agreed on, although it is quite a close call considering the short time left for negotiations.

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