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Unedifying Events in Washington Unlikely to Alter FX Trends

USD: Unedifying events in Washington unlikely to alter FX trends Protestors storming the seat of democracy is hardly an event expected of a first world economy, especially the US. On paper this could demand an extra political risk premium of US asset markets and the dollar. However, the early judgement from US equity futures (March Nasdaq +1%) are that these events represent the final acts of an out-going administration and instead the focus is on what a Democrat controlled Congress can deliver in 2021. Helping to drive the US recovery is also super-loose Fed policy. Last night’s release of the FOMC December minutes make good reading and remind us that the Fed will be printing $120bn per month – with a threat to do more – probably into 2022. Despite the pick-up in US inflation expectations, it seems the Fed will have a very high bar to concluding that ‘substantial progress’ has been made towards its employment and inflation goals. Reflationary Fed policy looks here to stay and assuming the post-Covid recovery story is not seriously challenged, it looks like equity and commodity markets should stay bid. Softer US jobs data (ADP yesterday, weekly claims today or NFP tomorrow) look unlikely to change the narrative and we expect the dollar to stay soft.

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; losses are relatively light, compared to its G10 peers, and the commodity currencies more particularly, however, and 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 Trade and Ivey PMI 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: One stand-out trend yesterday was the out-performance of banking stocks – not just in the US but in Europe too – on the back of yield curve steepening. Investors have been underweight financials since the start of the trade wars in early 2018. A rotation back into cyclicals, such as financials, could stand to benefit European bourses more than the US, where the weight of financials is greater in benchmark indices – e.g. 15% in Europe Stoxx 600 vs. 11% in S&P 500. This is another potential EUR positive. Events in Washington will likely keep EUR/USD pre-occupied in the short term and the Dec Eurozone CPI will be a focus today, but overall, we favour EUR/$ to 1.25.

GBP: Negative rate threat still weighs on GBP Renewed UK lockdowns have seen 12m expectations for the BoE policy rate drop 10bp – crucially back into negative territory. It’s hard to see this being unwound short term, but we doubt GBP/USD has to trade too much higher.

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