FX week ahead: Disorderly sell-off in Treasuries still stalk the FX market
USD: US Treasuries continue to cause havoc
Spot
DXY92.01
Week ahead bias
Neutral
Weekly range
91.30 - 92.20
1 month target
91.00
The FOMC meeting last week took center stage with the main takeaway from the event – a dovish undertone for an extended period of time. This resulted in the US Treasury market remaining unprotected adding to fears of a disorderly selloff in Treasuries. The spike of US 10-year yields to 1.75% certainly proved the point with volatility likely to continue. Put together most expect the disorderly selloff of US Treasuries to plague both equity and FX markets in the weeks to come.
FX markets will start the week nervous about US Treasuries which is most likely to drive FX direction for the week. Data wise, the US Calendar is relatively quiet with only February personal income data on deck. The FOMC will also be a driving force this week with lots of Fed speakers including Powell testifying on Tuesday and Wednesday alongside Treasury Secretary Yellen. The greenback will likely remain supported by sluggish rollouts of vaccines across Europe and expected monetary tightening in Brazil, Turkey and Russia.
CAD: Will the BoC step in to calm the wild bond market?
Spot
USD/CAD1.2520
Week ahead bias
Neutral
Weekly range
1.2420 – 1.2620
1 month target
1.2500
There were no major spikes in February’s CPI numbers which provided a great runway for the BoC to continue its dovish stance “lower for longer”. The next inflation report is due a few hours before the April 21st meeting where economists expect the BoC to begin tapering current monetary policy measures.
There were some significant and wild swings in yields last week with Canadian Treasuries seeing the biggest increase in the G10 space in 2021 with a (+92bp) rise. Analysts continue to call for intervention by the BoC given the scary spikes which are likely to continue before the next BoC meeting. That said, the bond market is likely to be much healthier by the end of April but current volatility is likely to keep the BoC concerned over the immediate future. On the data side, retail sales in January dropped by a smaller margin than expected with no major data release until the January GDP numbers on 31 March. In the short term, the CAD will trade on broader market themes and the trajectory of oil prices.
EUR: A new Covid wave and new lockdowns imminent
Spot
EUR/USD1.1880
Week ahead bias
Neutral
Weekly range
1.1855 - 1.2000
1 month target
1.2100
Europe’s Covid-19 vaccination rollout continues to take its tool on the EUR. A new wave of covid spikes now look all but imminent in France, Italy and the Netherlands. New lockdown measures are coming into effect keeping pressure on the euro in the short term. The slow roll out of vaccines and safety concerns over the AZ vaccine have not help either.
This week’s economic calendar will be focused on how much the ECB increased its PEPP bond buying as well as a whole slew of ECB speakers. Data-wise the highlights will be the first look at March PMIs for the larger European economies and the German Ifo. With parts of Europe heading back into lockdown the euro will continue to remain pressured, closing the past week at 1.1855. Looking past the next several weeks, the euro is likely to rebound against the USD on trade fundamentals possibly toward the mid 1.30’s by the year end.
GBP: A return to the 1.40 level remains consensus
Spot
GBP/USD1.3850
Week ahead bias
Mildly Bullish
Weekly range
1.3730 – 1.4000
1 month target
1.3400
This coming week will be data packed week for the UK. After last week’s BoE meeting the upcoming reports will likely have a very small impact on the direction of the pound. Upcoming data releases including March headline CPI (Wed), January unemployment rate (Tuesday), March Service PMI (Wed) and February Retail sales (Fri). Overall, none of the above data releases are likely to change the current GBP sentiment.
The GBP/USD is likely to continue to drift higher given the current risk environment and macro-analytics. Trading bias remains higher with an expected return to the 1.40+ levels given the positive GBP outlook driven by the fast vaccination process and the expected economic rebound in 2Q.
Currency Chart
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