USD: Ahead of Joe Biden’s inauguration tomorrow, the focus shifts to Treasury Secretary nominee Janet Yellen, whose confirmation hearing in the Senate today will focus on two topics – fiscal stimulus and dollar policy. The prepared remarks suggest comments on both should be market-friendly. On fiscal policy, Yellen is to suggest that the US ‘’act big’’ and make use of low borrowing costs. On the dollar, it should be reiterated that the new administration is committed to the market-determined exchange rate. Both are in line with a weak USD outlook. Further fiscal stimulus, along with a non-reactive Federal Reserve, should make front-end US real rates even more negative and naturally weigh on the dollar, as a global economic recovery from 2Q21 onwards would benefit cyclical currencies globally vs USD.
CAD: The loonie lost a little more ground through the overnight session but losses are more or less in line with its G10 commodity peers. Reports that President-elect Biden plans yesterday to issue an executive order to halt the Keystone XL pipeline on day one of his administration added to headwinds to the CAD overnight. Biden opposed the project during the Obama administration so this position is perhaps no surprise and the lengthy delays the project has already seen may limit the impact that cancellation might have on the CAD. Canada releases. The data calendar is heavy today with manufacturing sales and wholesale trade. Tomorrow’s BoC policy decision may also curtail movement in the CAD somewhat; we expect policy to remain on hold but speculation of a “micro cut” persists around the fringes of the rates market.
EUR: Although the US economy is set to outperform the eurozone economy this year and grow faster (absent any tightening from Fed monetary policy - don’t expect this year or next), EUR/USD should grind higher throughout the year – towards 1.30. In Italy, after winning a confidence vote in the House yesterday, Prime Minister Giuseppe Conte faces a vote in the Senate today. He is expected to win, though with only a simple, rather than absolute, majority (needed to pass certain laws). Hence the saga of Italian political uncertainty is unlikely to end.
GBP: Continues to remain rangebound and the light data calendar today suggests no change to this trend. Bank of England Chief Economist Andy Haldane’s speech today is unlikely to affect GBP much, as the market has already adjusted to the lower probability of negative rates following Governor Andrew Bailey's comments last week.
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