Good Morning; as was widely predicted, the currency markets were dominated by the US bond market’s gyrations last week as the dollar rose and fell in unison with yields.
The renewed upward pressure on yields came about after President Biden finally signed the $1.9trl stimulus bill on Thursday, paving the way for each household to receive cheques for $1400.
The president also announced that he will order all states to make COVID-19 vaccinations available to all adults by May 1st with the aim that Americans will be able to celebrate Independence Day on 4th July with some semblance of normality. These moves will massively boost the economy and have heightened fears of inflation in the US, which would herald a quicker and steeper rise in interest rates than previously anticipated.
The key events in the week ahead are the US Federal Reserve’s meeting on Wednesday and the Bank of England’s on Thursday, after which we will be able to compare their actions with the European Central Bank. The ECB signalled last week that it wishes to carry on with its quantitative easing programme, as expected, and announced that it would step up its bond-buying programme if needed to keep a lid on yields. Their actions aim to stimulate the economy by flooding it with cash and can be partly explained by the continuation of extensive lockdowns in parts of Europe. The ECB’s moves are in complete contrast to the Federal Reserve who are happy to see yields rise as their main concern is still an unemployment level which is still nearly 10 million higher than at the start of the pandemic. Currently, the UK and the pound sit somewhere in the middle, with the successful vaccine roll out dominating traders’ thoughts, and it is unlikely that the BoE will rock the boat this week.
With children returning to school last week, many parents breathed a sigh of relief, it signalled the start of a return to normality. It is hoped that the COVID-19 caseload continues to decline as it has been doing, and the rest of the population can successfully follow the roadmap back to normality that Boris Johnson has laid out. The pound is still benefitting from the vaccine’s rapid rollout and has gained nearly a cent against the dollar in the last week to open at $1.3920. The vaccine dividend is seen as so powerful by investors that, at least for the time being, the increasing friction with the EU is all but being ignored. One event dominates the week ahead, the Bank of England’s monthly meeting, followed by Andrew Bailey’s press conference, on Thursday. A cautiously upbeat assessment of the economy is expected to be presented alongside no change in policy, neither of which should impact the pound.
Europe is still battling with rising case numbers and slow vaccine rollouts exacerbated by ongoing doubts about the AstraZeneca vaccine. These worries and the continued intervention to keep bond yields low by the ECB has subdued the euro, and it has opened this morning at €1.1650 against sterling. Yesterday’s regional elections in Germany showed a slump in support for the ruling CDU party as it bore the brunt of the blame for the poor vaccine rollouts. This could be the first signal that Germany and Europe will struggle to find solid leadership in the post-Merkel world and worry investors in the euro. In the short term, the euro’s direction will most likely come from the Central Bank meetings in London and Washington with little on its data docket to detract. Amongst the little data released, the highlight is likely to be the Consumer Price Index on Wednesday and Germany’s Producer Price Index on Friday.
With clocks springing forward in the United States over the weekend, we are now one-hour closer, albeit temporarily, until March 28th, when ours also move forward, and the US markets’ impact will be felt earlier in the day. As mentioned previously, the US bond market, and in particular the yield on 10-year bonds has been the driving force behind the dollar. With US yields rising with what appears to be benign neglect by its Central Bank, the opposite is happening in Europe, and the euro continues to suffer, opening this morning at $1.1930. This week’s dominant event is the Federal Open Market Committee meeting on Wednesday when we expect that the Federal Reserve will reiterate its commitment to lower unemployment at all costs. Away from the Fed, US data released over the next few days is expected to be somewhat underwhelming. February retail sales should come in lower after the stimulus-inspired January surge. Also released are the February Industrial Production numbers, which will be most likely distorted by the last of the winter storms.
The krona had a volatile week but was essentially traded within an 8 öre range against the euro and sterling. An unfavourable article by an esteemed Bloomberg FX analyst surfaced on Thursday saying that the recent sluggish performance of the krona, despite it being tipped to be the best performing G10 currency 2021, has made some market participants wary and that they are now changing their predictions for the year and instead of turning their eye towards the krone instead. NOK/SEK is now trading above parity which symbolises the spectacular comeback the krone has made in precisely a year. Today we are watching the latest inflation figures from Sweden closely. They are expected to come in unchanged at 1.6% on a year-on-year basis.
In Norway, Norges Bank Governor Olsen is setting the Deposit Rate on Thursday. He is not expected to announce any changes, but as always, the press conference afterwards will be the key for us to watch. The krone has a lot of momentum and wind in its sails at the moment, which means that any sign of more positivity can further its gains against most currencies. We will therefore monitor the NOK/SEK cross to see if it heads higher, which would mean that more krona is being sold in favour of krone, causing further krone strength in the short term.