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By XE Market Analysis January 14, 2021 4:32 am
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    XE Market Analysis: Europe - Jan 14, 2021

    Modest weakness in the euro and yen, along with a smidgen of firmness in the Canadian dollar, were pretty much the only directional themes among the main currencies in trading through to the early London interbank session. EUR-USD edged out a two-day low at 1.2136, which is 4 pips shy of the 24-day low that was seen earlier in the week. A lift in the 10-year U.S. T-note yield back above 1.1%, alongside the continued resonance of ECB Lagarde and Villeroy's rhetorical shot across the bows of euro bulls, seems to have maintained EUR-USD's heaviness. U.S. yields had dropped back by a few basis points over the last couple of days after some Fed policymakers downplayed the prospect for tapering this year, though have now lifted again on a CNN report, citing two sources, that president-elect Biden will announce during a keynote speech later today a $2 tln stimulus package, which dwarfs the hitherto anticipated $1.3 tln size. If this proves to be correct, we may seen a bigger rise in yields, along with a bid for dollars. Elsewhere, Cable settled in the lower-to-mid 1.3600s, while EUR-GBP remained heavy, although above the two-week low that was seen at 0.8881 yesterday. USD-JPY, meanwhile, posted a two-day high at 104.19 on the back of a moderately softer Japanese currency, which saw AUD-JPY peg a six-day high, and CAD-JPY lift into one-month high territory. USD-CAD edged out a six-day low at 1.2677. Oil prices have settled after yesterday hitting new 11-month highs. Unexpected drawdowns in weekly U.S. crude inventories have underpinned oil prices this week. Stock markets in Asia and U.S. index futures have been buoyed by the CNN report on Biden's stimulus plans.

    [EUR, USD]
    EUR-USD edged out a two-day low at 1.2136, which is 4 pips shy of the 24-day low that was seen earlier in the week. A lift in the 10-year U.S. T-note yield back above 1.1%, alongside the continued resonance of ECB Lagarde and Villeroy's rhetorical shot across the bows of euro bulls, seems to have maintained EUR-USD's heaviness. U.S. yields had dropped back by a few basis points over the last couple of days after some Fed policymakers downplayed the prospect for tapering this year, though have now lifted again on a CNN report, citing two sources, that president-elect Biden will announce during a keynote speech later today a $2 tln stimulus package, which dwarfs the hitherto anticipated $1.3 tln size. If this proves to be correct, we may seen a bigger rise in yields, along with a bid for dollars. The release of the minutes to the ECB meeting today will be of some interest with regard to policymakers take on recent euro appreciation.

    [USD, JPY]
    USD-JPY, meanwhile, posted a two-day high at 104.19 on the back of a moderately softer Japanese currency, which saw AUD-JPY peg a six-day high, and CAD-JPY lift into one-month high territory. The yen's inverse correlation with risk appetite was apparent once again, with reports that president-elect Biden is considering a massive $2 tln stimulus package giving global equity markets a boost.

    [GBP, USD]
    Cable has settled in the mid 1.3600s, down on yestrday's high at 1.3701, which is just 4 pips from the 32-month peak that was seen last week. At the same time, EUR-GBP has remained heavy, near two-week lows under 0.8900. The pound was lifted earlier in the week after both the BoE Governor Bailey and Deputy Governor Broadbent sounded cool on negative interest rates. This, along with the rapidly proceeding Covid vaccination program in the UK, which is on track to have nearly 25% of the population vaccinated including nearly all of the at-risk groups by mid February, has been behind the recent pound's buoyancy. The Covid vaccination rollout is providing investors a 'bridge' over prevailing lockdown realities, with UK nations last week going into a 'tier 5' lockdown, the most restrictive level since the full 'mother lockdown' of spring last year, and with talk of a yet more restrictive 'tier 6' being introduced. The UK economy underperformed its G20 peers during lockdowns last year, and there is a view that the inverse may be seen during a vaccine-assisted route out of lockdowns. Regarding the post-Brexit world, the UK's terms of trade with the EU has eroded, despite the deal, and the key financial services sector has been left in a strategically more precarious position than before, with participation in EU markets dependant on the latter's equivalency rules -- although London's competitive advantage in this area should protect the sector over the near- to-medium term. There is also potential for pent up business investment, with Brexit uncertainty having finally cleared. 0verall, we are taking a neutral view on sterling at this juncture, not seeing either strong downside or upside risks.

    [USD, CHF]
    The recent weakening in the Swiss fran will have been pleasing to policymakers at the SNB, given their chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

    [USD, CAD]
    USD-CAD edged out a six-day low at 1.2677, and CAD-JPY posted a one-month high while the Canadian dollar has scaled to two-month highs in the case against the euro. The Canadian dollar's outperformance has been concomitant with the recent oil price rally. Front-month WTI futures hit a fresh 11-month high yesterday at $53.93, and while since correcting back by over $1, prices remain up by 9% on the month so far. Unexpected drawdowns in weekly U.S. crude inventories have underpinned oil prices this week. Reports that U.S. president-elect is considering a massive $2 tln stimulus package should also keep crude underpinned. There remain reasons for caution with regard to oil's upside potential, given demand-sapping Covid restrictions across the northern hemisphere, and with tanker-tracking data showing compliance among OPEC+ producers to maintain output quotas falling to 75% in December.

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