After a week of stock volatility, market fundamentals will drive direction
USD: Looking beyond Robinhood and stock volatility
Spot
DXY90.452
Week ahead bias
Neutral
Weekly range
90.10 -90.80
1 month target
90.00
The greenback had a strong week last week against most of the G10 currencies as a choppy risk environment fueled demand for the dollar. The pause in the dollar decline doesn’t seem over as the current environment remains ripe for further decline. The Fed maintained its “lower for longer” stance which leaves the USD rate profile unsupportive of the currency, this coupled with a resumption of a risk rally in the coming months doesn’t bode well for the greenback. The unusual driver for risk appetite in the last week has been the high volatility induced retail trading platform Robinhood. Though there have been trading restrictions placed on the online platform, events from the last week are likely to keep investors jittery over the coming days. The defensive dollar positions may remain for a little while longer before being unwound.
The coming week will see the market’s focus on fundamentals rather than induced market volatility. This week boasts the first set of hard data for 2021. The January jobs report will be front and center which we expect will come in at +100k, slightly above consensus, but unlikely to generate much market excitement. What could cause a seismic shock will be any development on the US fiscal stimulus front, as President Biden will attempt to talk some Republican lawmakers into supporting. His $1.9tn plan given a razor thin majority has cast doubts over his ability to push the bill through Congress. All in all, we could be looking at some stabilization in the dollar next week, although the balance of risks beyond the short-term remains tilted to the downside.
CAD: Data surprises and commodity prices remain key drivers
Spot
USD/CAD1.2782
Week ahead bias
Neutral
Weekly range
1.2700 – 1.2850
1 month target
1.2700
Canadian data continues to surprise to the upside with monthly GDP numbers for November showing a 0.7% increase, with the YoY slump coming at a moderate -2.8% compared to the consensus -3.2%. USD/CAD was back below 1.28 on Friday – although that’s mostly due to some dollar weakness. We expect the loonie to find stabilization and further direction this week with the employment data coming into focus at the end of the week.
Canadian employment numbers have generally the US ones in the recovery, and another surprisingly good read may help CAD towards the end of the week. Before that, external factors will be the key drivers for the currency: first, any developments in the US fiscal stimulus talks; second, any improvements on the OPEC compliance picture with members meeting on Wednesday.
EUR: Data suggests continued resilience
Spot
EUR/USD1.2138
Week ahead bias
Neutral
Weekly range
1.2090 – 1.2200
1 month target
1.2200
EUR/USD has held above the 1.2100 level for most of last week showing some resilience to the dollar buying pressures of a choppy market last week. The EUR ended last week on a high helped by above consensus reads in Spain, France and Germany’s Q4 GDP. The takeaway from the reads suggests that the second Covid-19 wave had much less impact on the economy as the first. Given the positive data prints, economists now expect the eurozone to have contracted by less than 1% in 4Q.
In the week ahead, as January preliminary inflation numbers are expected to increase thanks to a German VAT increase and higher energy prices. While the greenback may fail to show signs of weakness, there doesn’t seem much to for the euro to lose its resilience. The Italian political developments should remain a marginal story for the EUR as the risk of early elections still appears low.
GBP: Sterling continues to lead vaccination process putting it ahead of its peers
Spot
GBP/USD1.3746
Week ahead bias
Bullish
Weekly range
1.3600 – 1.3900
1 month target
1.3600
Sterling continues to reap the benefit of a fast vaccination process in the UK putting it well ahead of most of its peers. Most estimate that the currency currently remains undervalued with fair value models suggesting an appreciation of the GBP/USD to above 1.50 by the end of the year.
The big focus for the sterling this week will be the BoE meeting. Most economists expect no change in the policy rate and no clear signal at negative. That said, the BoE may formally lower its estimate of the lower bound to below zero next week, don't expect policymakers to hint that negative rates are imminent. Put all together – there shouldn’t be much impact to the currency this week.
Currency Chart
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