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By XE Market Analysis January 13, 2021 7:01 am
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    XE Market Analysis: North America - Jan 13, 2021

    The dollar lifted out of lows, aided by gains against the euro after ECB's Villeroy fired a rhetorical volley across the bows of euro bulls, reminding the forex market that he and his colleagues "are monitoring with particular attention the negative effects of the euro exchange rate." Market participants, meanwhile, overlooked a much stronger than expected Eurozone industrial production data. The ECB's concern about euro appreciation alongside prospects for an unrestrained Biden presidency in the U.S. are grounds to reconsider the upside potential of EUR-USD. With this in mind, market attention is shifting to president-elect Biden's scheduled outlining of his economic stimulus plan, tomorrow, which is expected to be sizeable, with implications for U.S. economic growth and inflation, and in turn Fed policy. The dollar had softened following remarks by Fed hawks Mester and George, yesterday, who pushed back on speculation that the central bank might taper its asset purchase program during 2021. The DXY dollar index recouped to 90.30 after earlier posting a new low for the week at 89.94. The three-week high that was seen on Monday is at 90.73. EUR-USD dropped back under 1.2200 after earlier lifting above Tuesday's high to a peak at 1.2223. USD-JPY firmed towards 104.0 from a six-day low at 103.53. Cable dipped to the mid 1.3600s after probing above 1.3700. Elsewhere, both AUD-USD and NZD-USD dipped after pegging five- and two-day highs, respectively. USD-CAD lifted out of a two-day low at 1.2701. The Canadian dollar and other oil correlating currencies had earlier lifted in sync with a rally in oil prices, the latest phase of which was fuelled by weekly U.S. crude inventory data from API, released yesterday, which showed a 5.821 mln barrel depletion in stocks, much bigger than the market consensus for a 2.266 mln barrel draw.

    [EUR, USD]
    EUR-USD has dropped back under 1.2200, leaving a two-day high at 1.2223. The dip mostly reflects the dollar having lifted out of lows, though the euro has also been under pressure against the pound, and heavy against the yen and Swiss franc. At the same time, the common currency has gained slightly on the dollar bloc currencies. ECB's Villeroy fired a rhetorical volley across the bows of euro bulls, reminding the forex market that he and his colleagues "are monitoring with particular attention the negative effects of the euro exchange rate." He is of course indirectly referring to the currently unwanted tightening effect on real interest rates that an appreciating currency brings. Coming from a relatively hawkish member of the ECB (being ascribed at a '4' rating on Econostream's hawk/dove scale (1 being 'very dovish' and 5 being 'very hawkish'), his remarks carry extra weight. Market participants, meanwhile, overlooked a much stronger than expected Eurozone industrial production data. The ECB's concern about euro appreciation alongside prospects for an unrestrained Biden presidency in the U.S. are grounds to reconsider the upside potential of EUR-USD. Remarks by Fed hawks Mester and George, yesterday, who pushed back on speculation that the central bank might taper its asset purchase program during 2021, had weighed on the greenback, and focus will now turn to president-elect Biden's outlining of his economic stimulus plan, tomorrow. The dollar bearish thesis that dominated in November and December remains alive, although has lost appeal in the wake of the Georgia runoff elections. It is hinged on the view that U.S. assets are richly priced relative to global assets, which are likely to attract greater investment flows in the global reflation trade, which in turn is hinged on Covid vaccination programs proving effective around the world.

    [USD, JPY]
    USD-JPY lifted back towards 104.00 after earlier printing a six-day low at 103.53. Remarks by Fed hawks, who pushed back on speculation for a tapering in asset purchases during the year, have knocked Treasury yields lower. U.S. CPI data for December, released later today, is also expected to reaffirm the relatively high level of inflation compared to peers, albeit at only an expected 1.3% y/y rate (up from 1.2% in November) in the headline reading. The data will in turn reaffirm the negative U.S. real interest rate differential versus Japan and the Eurozone, among other economies.

    [GBP, USD]
    Cable ebbed back to the mid 1.3600s amid a dollar rebound. The pair earlier posted a 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 posted a new 12-day low. The pound yesterday rallied after both the BoE Governor Bailey and Deputy Governor Broadbent sounded cool on negative interest rates. 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 also been in the market's conscience, as indeed it is in minds of BoE policymakers. 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, The UK data calendar this week is highlighted by the release of production, monthly GDP and trade data for November (all due on Friday). 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]
    USD-CAD posted a two-day low at 1.2701, partly on broad weakness in the U.S. dollar and partly with the Canadian dollar and other oil correlating currencies having lifted in sync with the rally in oil prices. The latest phase of the oil rally was fuelled by weekly U.S. crude inventory data from API, released yesterday, which showed a 5.821 mln barrel depletion in stocks, much bigger than the market consensus for a 2.266 mln barrel draw. Crude prices were already buoyant heading into the API data release, thanks to Saudi Arabia's announcement last week for a 1 mln barrel a day production cut in both February and March. Front-month WTI oil futures earlier hit a new 11-month high at $53.93. 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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