FX Update - February 8
By: Stuart Cowell
Head Market Analyst
The Dollar found a footing after posting fresh declines against some currencies, which extended losses seen on Friday following the headline payrolls miss. However, the details of the jobs report (hours worked and earnings) were strong, and US yields have remained perky, which along with the approaching mega-stimulus spending binge, has ensured the Dollar picked up demand on dips.
The USDIndex edged out a six-day low at 91.21 before capping out, while EURUSD pegged a six-day high at 1.2055 before turning over. The Yen underperformed, which moderately lifted USDJPY moderately to a high at 105.67, reversing a good portion of the decline seen on Friday after the pair clocked a three-month high at 105.78. Yen crosses were firm, with EURJPY posting a one-week high and AUDJPY breaching above 81.00 for the first time since December 2018. Cable ebbed back to levels around 1.3700 after testing Friday's one-week high at 1.3742. AUDUSD also fell back after earlier lifting to a 10-day high at 07682. USDCAD remained heavy but held just above the 1.2749 10-day low that was seen on Friday.
Both the Pound and UK gilt yields were elevated after the BoE's more upbeat than expected guidance last week, following its February policy meeting and release of its quarterly Monetary Policy Review, which laid to rest any lingering expectations that the negative interest rate option would likely be implemented. The central bank's overall upbeat outlook was a jolt to the prevailing sentiment, especially in the context of recent ardent dovish signalling from policymakers at the Fed, ECB, RBA and others. The central bank's 2021 UK GDP growth downgrade, to 5% from 7.5%, which was due to a harsher than anticipated return to Covid lockdown measures, was immaterial for markets, with policymakers projecting a rapid recovery toward pre-pandemic levels during 2021, hinging this on the assumption that the vaccination program will lead to an unwinding of societal restrictions. The BoE did caveat that the outlook remains unusually uncertain due to the vicissitudes of the global pandemic.
The UK data calendar is quiet this week, at least until the release of Q4 and December GDP data along with December production and trade data on Friday, which will seem particularly backward looking given the focus on exiting from Covid related lockdowns. On the vaccine front, the UK has now vaccinated over 15% of its population, which is among the most extensive rollouts globally so far. This compares to about 3% in the EU, which has been a bearish argument for EURGBP. With new positive case results and Covid hospitalisations plummeting, the process of de-restricting the economy should start within weeks in the UK, although international travel looks likely to remain heavily restricted given concerns about new virus variants entering the country.
Oil prices posted fresh trend highs once again. Front-month USOIL futures printed a fresh 13-month high at $57.67. Oil has been underpinned by a variety of factors lately, ranging from demand-stimulating cold weather in Europe, to the large inventory draw in the weekly US data last week, to continuing OPEC+ supply constraint (Saudi Arabia last week commenced a unilateral supply cut that will last through to the end of March), and the approaching mega-stimulus program in the US. There are downside risks to the oil market ahead, given the juxtaposition of prices having returned far into pre-pandemic ranges and with global demand not likely to return to pre-pandemic levels for a considerable time yet. In other news, a study found the Oxford/AstraZeneca Covid vaccine was less effective in dealing with the so-called South African variant of SARS-Cov2 coronavirus. The other vaccines are looking to be similarly less efficacious against this strain, too, though some experts have been downplaying it, saying that the existing vaccines can be easily tweaked to adapt to new variants. Global stock markets haven't been too perturbed, and have remained underpinned.
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