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By XE Market Analysis January 20, 2021 7:09 am
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    XE Market Analysis: North America - Jan 20, 2021

    The dollar traded softer for a third day amid a backdrop of buoyant global stock markets. The MSCI Asia-Pacific index clocked a fresh record high. The 'looking-past-Covid' reflation trade seems to have stirred, following recent dormancy, aided by the anticipation of a big spending Biden era in the U.S. Biden will be inaugurated as the 46th president later today. There is a risk of violent protest given recent events, though with President Trump has turned down his rhetoric -- yesterday wishing the new administration well during his farewell speech, for instance (although managing not to actually name Biden) -- the risk seems to have abated. The DXY dollar index posted a low at 90.28, extending the retreat from the one-month high that was seen on Monday at 90.95. The index is set for its first three-consecutive-day decline since mid December. EUR-USD concurrently lifted to the mid 1.2100s, putting in some distance from the one-month low that was seen on Monday at 1.2055. The euro wasn't impacted much by a Bloomberg story, citing sources, confirming that the ECB is actively targeting spreads and thus borrowing costs for governments across the Eurozone, which doesn't come as a surprise. Cable printed a fresh 32-month high at 1.3718, aided by a bout of sterling outperformance in addition to the generally softer dollar. EUR-GBP clocked an eight-month low. The dollar bloc and other cyclical currencies also gained, not surprisingly. USD-CAD pegged a five-day low at 1.2689, for instance. The oil correlating currencies have been benefiting from perky crude prices. Front-month WTI futures rallied over 1% in printing a five-day high at $53.72, which is just 31 cents shy of the 11-month peak that was seen a week ago.

    [EUR, USD]
    EUR-USD lifted to the mid 1.2100s, putting in some distance from the one-month low that was seen on Monday at 1.2055. The euro wasn't impacted much by a Bloomberg story, citing sources, confirming that the ECB is actively targeting spreads and thus borrowing costs for governments across the Eurozone, which doesn't come as a surprise. The dollar, meanwhile, has traded softer for a third day amid a backdrop of buoyant global stock markets. The 'looking-past-Covid' reflation trade seems to have stirred, following recent dormancy, aided by the anticipation of a big spending Biden era in the U.S. Biden will be inaugurated as the 46th president later today. There is a risk of violent protest given recent events, though with Trump himself, aware of the sharp drop in his approval rating, having turned down his rhetoric -- yesterday wishing the new administration well during his farewell speech, for instance (although managing not to actually name Biden) -- the risk seems to have abated. The ECB's board meets on monetary policy this week (Thursday). After the PEPP and TLTRO programs were bolstered in December, the central bank is unlikely to further top up the existing policy. The transformation of the PEPP volumes into a ceiling rather than a target has given the ECB some flexibility, although governments hooked on low rates will likely increase the pressure on the central bank not only to use PEPP in full but also to push out the end date of the program as far into the future as possible. Markets will watch for comments on the euro and the future of the inflation target amid the ECB's ongoing strategic policy review. The latest update of the 'Big Mac index' of the Economist magazine, which is a PPP measure of relative currency valuations, found the euro to be 9% undervalued relative to the dollar.

    [USD, JPY]
    The yen's performance should continue to derive from the level of risk appetite in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.

    [GBP, USD]
    The pound has broken higher, which has in part been a function of EUR-GBP breaking through recent lows, on route to printing an eight-month low at 0.8837. Cable concurrently punched above last week's trend highs to a fresh 32-month peak at 1.3718. Market narratives are talking about the breach of key downside technical levels in EUR-GBP, along with the perkier than anticipated December inflation data out of the UK, which came with last week's downplaying of the negative interest rate option by BoE Governor Bailey and Deputy Governor Broadbent still resonating in the market conscience. UK December inflation figures, releases earlier, saw headline CPI come in slightly warmer than expected, at at 0.6% y/y rate, up from 0.3% in the month prior. The median forecast had been for a rise to 0.5% y/y. Other pound positives, which we have been noting, include reports of long-term investor interest in UK assets over the last, which have been left undervalued by the impact of both the long Brexit process and Covid lockdowns (the UK economy having underperformed G20 peers during lockdowns last year). An illustration of this is provided by the January update of the Economist magazine's Big Mac index, a measure of 56 currency valuations according to the theory of purchasing power parity, which showed the the pound to be 22% undervalued against the dollar. Associated with this view is the fact that the UK is among the leaders of the pack in the rollout out of Covid vaccinations, and is on track to have nearly 25% of the population vaccinated including nearly all of the at-risk groups as soon as mid February.

    [USD, CHF]
    Policymakers at the SNB retain a 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 pegged a five-day low at 1.2689. Aside from the generally softer U.S. currency, the oil correlating currencies have been benefiting from perky crude prices. Front-month WTI futures rallied over 1% in printing a five-day high at $53.62, which is just 31 cents shy of the 11-month peak that was seen a week ago. At prevailing levels, oil prices are up by over 10% on the month so far. Unexpected drawdowns in last week's U.S. crude inventories underpinned prices, especially as this followed Saudi Arabia's announcement in the week before of a 1 mln barrel per day production cut in both February and March. 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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