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By XE Market Analysis January 12, 2021 7:00 am
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    XE Market Analysis: North America - Jan 12, 2021

    The dollar has taken a step back, correcting some of the gains that have been seen since it become clear that the Democrats in the U.S. were going to control the Senate, in addition to the Presidency and House. Some narratives attributed this in part to reportedly large demand for China's yuan, linked to the proximity of the one-week Lunar New Year holiday, even though this is a month away (on February 11th). This saw USD-CNY drop back from the one-week highs that were seen yesterday. The market also seems to remain dollar bearish, despite the increase in expectations for the Fed to taper asset purchases sooner than had been generally assumed before the Georgia runoff elections, although the current reality of Covid-related restrictions are countering this argument, at least over the nearer term. The dollar bearish thesis in markets is hinged on the view that U.S. assets are richly priced relative to global assets, which are likely to attract greater investment interest in the global reflation trade, which in turn is hinged on Covid vaccination programs proving effective around the world. The DXY dollar index fell to the lower 90.0s after yesterday capping out at a three-week high at 90.72. EUR-USD settled around 1.2150 after posting a three-week low at 1.2132. USD-JPY retreated to the lower 104.00s after yesterday printing a one-month high at 104.40. The biggest movers have been the dollar block, with the Australian and New Zealand dollars posting near 0.5% gains on the U.S. dollar. The Canadian dollar also picked up after recent underperformance, aided by a near 1% gain in oil prices today, which put front-month WTI crude at a fresh 11-month high at $52.77. USD-CAD dipped to a low at 1.2730, down from yesterday's two-week peak at 1.2837.

    [EUR, USD]
    EUR-USD's correction has extended for a fourth consecutive trading day, this time posting a 17-day low at 1.2154. Markets have been still digesting the upcoming Biden administration with Democrat control of both the House and Senate. The Democrat sweep will see a rising budget deficit and an increased prospect for stronger growth. This can be chalked up as a dollar positive influence, with a consequent spike in U.S. Treasury yields improving the dollar's yield attractiveness relative to peers. A higher inflation curve has potential to push down on real interest rates, though this would depend on the Fed sticking to its lower-for-longer policy rubric, which it may be less apt to do in context of the anticipated massive surge in fiscal expansion under an unrestrained Biden. Much of Europe, meanwhile, is in the tightest level of lockdowns since the 'mother lockdown' in spring last year, which threatens to put the region back in recession. Data out of Europe continue to show the manufacturing sector holding up, while the service sector takes a beating, bearing the brunt of Covid restrictions. The U.S. economy is also being negatively affected by Covid restrictions, though there is considerable variation in levels of response state by state. Overall, this backdrop, along with dollar-favourable shift in U.S. Treasury versus Bund yield differentials, has taken the wind out of the EUR-USD's uptrend. The pair had, early last week, clocked a 33-month high at 1.2350. For now, we anticipate that the prevailing bias will remain to the downside.

    [USD, JPY]
    USD-JPY posted a one-month high at 104.22. The recent spike in U.S. Treasury of JGB yield differentials, which has come as markets discount the Democrats clean sweep has been in the market mindset, has been underpinning the pair. Prospects for greater budget deficit fuelled growth also bodes well for the U.S. growth differential versus Japan and other economies. In Japan, the economy is heading back into contraction, as confirmed by the December PMI surveys, with key economic regions locking down in the face of rising positive Covid test results. Japanese policymakers will be welcoming of the yen's prevailing weakness, with USD-JPY's 100.00 level viewed as a line in the sand on the downside.

    [GBP, USD]
    The pound, which is the principal financial market barometer of Brexit sentiment, has traded net moderately lower since the UK left the EU's common market and customs union. The hasn't been any significant border disruptions as a consequence of the UK leaving, although the hassle of custom declaration form filling has increased in trade with the EU. The UK's terms of trade with the EU has eroded in the Brexited world, despite the deal, with the key financial services sector 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, while the UK is ahead of the pack in rolling out a Covid vaccination program. A pound weakening bias may prevail for a time, but with the government aiming to have nearly 25% of the UK population vaccinated by mid February, including all of the most at-risk groups, the pound looks a much better bet in the bigger view. UK nations went into a 'tier 5' lockdown last week, the most restrictive level since the full lockdown of spring last year, although there is already talk of a yet more restrictive 'tier 6' being introduced. Under the prevailing tier 5, manufacturing, auto repair businesses, DIY and garden stores, remain open, along with food sellers. High street retail, aviation and other public transport, along with the hospitality sector, are bearing the brunt of the lockdown, as in other nations, although the percentage impact on GDP from these sectors being closed is slightly bigger in the UK than most peers. The UK economy underperformed its G20 peers during lockdowns last year, so there is some thinking in market narratives that the UK will be apt to underperform again (although the way the UK compiles GDP data relative to other G20 nations may have exacerbated the picture). The UK data calendar this week is highlighted by the release of production, monthly GDP and trade data for November. Given the fast changing realities (new Covid lockdown, rapid vaccination program) the data is particularly backward looking, so will limited, if any, market impact.

    [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]
    The Canadian dollar has picked up after recent underperformance, aided by a near 1% gain in oil prices today, which put front-month WTI crude at a fresh 11-month high at $52.77. USD-CAD dipped to a low at 1.2734, down from yesterday's two-week peak at 1.2837.

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