Currency Market Analysis

Nov 25, 2020 | Currency Market Analysis

Global Themes

The US Dollar continues to nurse losses as global risk sentiment remains elevated. Huge progress towards a coronavirus vaccine has boosted investor confidence and triggered a rotation into riskier assets, amplified by increased expectations for a fiscal boost from a new US government.

Two big uncertainties that were hanging over global economic recovery prospects have made significant progress over the past couple of weeks. The world anticipates vaccines to be available before year-end and former Federal Reserve (Fed) Chair Janet Yellen, Joe Biden’s expected choice as US Treasury secretary, is boosting hopes of a pandemic fighting fiscal package. The trend has subsequently shifted to riskier assets, which is why currencies considered barometers of risk sentiment due to their close ties with the global commodities trade, like AUD, NZD and NOK have appreciated. Oil prices have also climbed higher and some stock indices have reached all-time highs.

The downbeat dollar is still trying to bat the Euro away from the $1.19 handle as EUR/USD builds on its +2% monthly gains in November. The $1.20 mark is in focus but should be a big resistance level.

USD

The US Federal Reserve (Fed) will publish the minutes from this month’s monetary policy meeting this evening. There was no policy change, but Fed Chair Jerome Powell stated possible tweaks to the central bank’s asset purchase programme were discussed.

The minutes will give investors a glimpse into how seriously the Fed is considering more stimulus in light of the surge in coronavirus cases worldwide. Having previously pledged to buy an unlimited quantity of US government debt, the Fed currently purchases $80bn a month across all Treasury maturities. An increase in monetary stimulus should not only boost global risk appetite, which would weigh on the dollar, but additional dollar supply would also weaken the world’s reserve currency.

The US Dollar is forecast to depreciate significantly in 2021, with many analysts calling anywhere from a 5% to 20% devaluation of its trade-weighted index.

GBP

UK finance minister Rishi Sunak will announce over £4bn of new funding measures today, covering initiatives to tackle the economic impact of the pandemic. The focus is on protecting jobs, as the government tries to repair the fragile UK economy.

The state restrictions to curb the spread of the virus have shuttered businesses and sparked unemployment levels to spike higher despite the job support schemes worth £13.4bn announced earlier this year. The impact on currency markets might be limited today, but the ongoing support should ease economic pressures going forward and should help recovery prospects and thus support the value of sterling. A big theme driving the pound’s value at present is whether a Brexit deal will be reached before the transition period expires at the end of this year. Optimism has helped GBP/USD climb over 3% this month and GBP/EUR over 1%, however, little evidence of trade talk progress has been revealed this week as the Brexit clock continues to run down.

The pound is also positively correlated with global risk appetite, which has helped it appreciate against safe haven currencies like the JPY and CHF recently.

CAD

The Canadian dollar pared gains after riding a record rally on Wall Street to fresh two-week highs. The loonie caught twin tailwinds from the Dow’s close Tuesday above 30K, a record high, and oil’s crest of $45, the highest in nine months. Progress toward a coronavirus vaccine and reduced political dysfunction in Washington now that the transition to the incoming Joe Biden administration is officially underway boosted investor confidence and appetite for stocks and commodities. Canada’s economic calendar kicks into high gear next week with top-tier numbers on third quarter growth (Tuesday) and the November jobs report Friday.


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