FX Risk Rally Continues as Stimulus Prospects Grow
Daily FX Market Roundup December 17, 2020
Risk appetite remains strong with equities and currencies extending their gains on Thursday. The growing prospect of a stimulus deal in the US and a Brexit agreement in the UK drove investors out of safe have currencies like the US dollar and Japanese Yen. High beta currencies took flight with strong gains in sterling, the New Zealand and Australian dollars. The greenback fell to fresh 2.5 year lows on the back of mostly weaker data. Although building permits rose strongly, housing starts grew at a slower pace, the Philadelphia Fed index tumbled to 11.1 from 26.3, a reading that was much weaker than anticipated. Most importantly, jobless claims continued to rise from 853K to 885K, reinforcing Fed Chairman Powell’s plans to keep interest rates at zero for the next few years.
Its been eight months since the last US stimulus package and after lots of back and forth a deal is finally in reach. The election in Georgia and control of the Senate is a powerful motivator and with McConnell and Pelosi telling lawmakers to stay in Washington, there’s a very good chance an agreement can be made by next week. At $900 billion it’s less than half of the package enacted in March but it includes more jobless benefits, rental assistance and PPP funds for businesses. At this stage, anything is better than nothing.
The market still thinks a Brexit deal is possible. Yesterday European Commission President von der Leyen said a narrow path has opened. This morning, the EU’s Barnier said good progress has been made while the UK’s Gove said they would do everything to secure a deal. However later in the day they appear to backpedal with von der Leyen talking about big divergencies on key issues like fisheries. All along, UK Prime Minister Johnson’s stance has been that no deal is “the most likely outcome” and today he reiterated that it looks very likely an agreement won’t be reached unless positions shift substantially. The Bank of England meeting was a nonevent for the British pound. Their decision to leave interest rates unchanged was widely anticipated as there’s no point to changing monetary policy weeks before the Brexit deadline. Two weeks won’t make much of a difference and its better to have all of the facts before recalibrating their asset purchase program. UK retail sales are due tomorrow and the November lockdown is expected to curtail spending with economists looking for -4.2% drop.
EUR/USD rose for the sixth day in a row. Even though new virus cases in Germany are stubbornly high and new restrictions just went into place, data from the region has been much better than expected. Improvements in PMIs are expected to carry over to Friday’s German IFO report. The current conditions component may decline but the expectations component should rise on vaccine optimism. If it doesn’t and both decline, it could trigger a correction in EUR/USD.
The strongest moves were in the New Zealand and Australian dollars which benefitted from stronger data. In New Zealand, the economy expanded by 14% in the third quarter after contracting by an upwardly revised -11% in Q2. In Australia, 90K jobs were created last month, surpassing the 50K forecast. The unemployment rate also dropped to 6.8% from 7%. Both of these improvements were anticipated as NZ was one of the first countries to reopen and Australia eased restrictions. The Canadian dollar on the other hand trailed behind with relatively modest gains. Despite a rise in oil prices, the currency’s rally is losing steam after central bank Governor said the economy is entering a difficult stage as the second virus wave raises the risk of a temporary contraction. New Zealand trade numbers are due for release this evening followed by Canadian retail sales Friday morning -stronger numbers are expected all around.