Date

Wednesday 20thJanuary 2021

Direction

Risk sentiment came back strongly on Tuesday after Monday’s sell-off but it still feels as though the peak of risk sentiment was at the start of the year.  Globally lockdowns are becoming stricter, meanwhile vaccine roll outs are finding various issues including supply constraints.  In the short term the picture is deteriorating and risk on and short USD positions are at risk of a further wash out.

Drivers

The seriousness of the virus is clear as China is now experiencing some small outbreaks, they are taking extreme measures to contain them, which is likely to be very effective, but it shows it is almost impossible to eradicate Covid.

Pfizer’s vaccine production has slowed due to changes to their manufacturing processes. This means that supplies have been delayed to Canada and the EU. Canada’s deliveries will be pushed back to Feb which will have a significant impact on their planned vaccine roll out. US is also struggling to keep up with demand with NY saying it will need to close vaccination sites unless it can get more supplies.

Looking at the markets the US 10yr yields came off after Yellen mentioned the possibility of reintroducing the 50yr bond.  The Italian PM Conte survived a confidence vote in the Senate. This should reduce political concerns that had begun to surround Italy this week and the Biden administration has shown first signs that it will continue a tough line against China with accusations of human rights abuses and unfair trade practices.

It is not yet clear when congress will vote on Biden’s proposed stimulus package.  Biden and Harris will need to be sworn in today before Senate control passes over to the Democrats. Then Yellen, once confirmed, should be able to help push to get Biden’s relief package through.

Canada CPI followed by BoC today. Some small expectation that they could cut rates by 10bps to 0.15% from 0.25% although there is almost nothing priced. The last employment print was weak with unemployment ticking up to 8.6% although recent PMI’s and Business Outlook figures have been strong.

There are a number of data releases coming up.  We have the BoJ and ECB on Thursday no changes expected from either.  The US 20yr Treasury auction today, given the recent focus on US yields these auctions have been market moving.  There is the UK CPI this morning, Silvana Tenreyro said that “having negative rates in our toolbox wil be important”. If UK CPI is weak it could bring February 4th BoE into focus.

Numbers to Watch
  • Today we like long USDCAD and short CADJPY as   expressions of risk off moves in G10. Canada is struggling to get vaccine supplies despite increasing virus cases, Biden is putting an end to the Keystone XL oil pipeline, and expect global lockdowns to weigh on oil, weak Canada employment figures leave a small risk of a 10bps cut from the BoC today which is under-priced.
  • Waiting for rallies to 0.8950 to fade the rally in EURGBP leaving room to add at 0.9000. Still expecting UK to outperform EU given the speed of the vaccine roll out in UK but in the short term the risk off could lead to GBP position reduction. Also watch out for UK CPI today as a weak print could reignite talk of negative rates at the BoE. 0.8863 still the level to watch on the downside.

Market Updates

EURUSD – The Euro rises above 1.2130 as expected, after risk-on sentiment weighed on the safe-haven US Dollar. The US Treasury Secretary nominee Janet Yellen urged lawmakers not to worry with higher debt burden and to “act big” in the fiscal relief department, to avoid a prolonged downturn in equities. Yellen’s comments put a bid under the US stocks, lifting major indices higher along with the single currency. If price breaks above the 200-SMA, then 1.2220 will be our next target.

GBPUSD  The Pound is on its way to revisit the 1.37 resistance, as expected, amid the overall risk-on mood and UK’s accelerated vaccine campaign. Earlier today, inflation in the UK up ticked, signaling the BoE Governor Andrew Bailey that there is no need for further stimulus, at least for now. On the other side of the pond, the US dollar remains under pressure as Biden prepares to become president. As a result, our bullish bias on the Cable remains intact for now, as 1.3750 becomes our new upside target.

USDJPY – The Dollar/Yen failed to break above 104 and turned south, as expected, after comments from Treasury Secretary nominee Janet Yellen pushed equities higher and yields lower after saying that “it´s time to go big on spending and worry about deficits later”. However, the US 10-year yields still needs to break below 1.07, to confirm further weakness on the greenback. Until then, the pair will likely stay in the same range.

FTSE 100 The FTSE 100 is still trading in a tight range between 6700 and 6750 despite UK inflation data, released earlier this morning, beating expectations for December as UK consumer prices rose 0.6% YoY in December double the 0.3% rate seen in November. The UK index finished slightly down yesterday, and it seems as if traders are in wait-and-see mode for now. In the absence of any other news that might push London stocks higher, the FTSE is expected to slip into the red again today with 6700 as support and target.

DOW JONESUS stocks climbed as Janet Yellen endorsed higher coronavirus relief spending and some of the country’s biggest banks beat expectations for fourth-quarter earnings with the Dow Jones climbing slightly above 31000 before retracing lower on profit-booking and on worries about surging coronavirus cases. Looking ahead, investors generally are confident the incoming Biden administration will take positive steps to shore up the US economy by going on a spending spree and achieving full employment again while reaching 2% inflation, so it will keep interest rates low and therefore market sentiment should remain robust for now in the absence of any other news.

DAX 30German stocks are seen opening on a flat note today as investors weigh coronavirus worries against hopes of fresh US stimulus with Chancellor Angela Merkel agreeing to tighten Germany’s restrictions. Looking ahead, Eurozone CPI figures are on the agenda, however the Dax index is expected to continue to show lack of direction with 13800 and 13900 as support and resistance.

GOLD – Gold hit our first long resistance target in yesterday’s session at 1850, making its way in early trade today towards 1860 on the back of weaker greenback after Yellen confirmed a market determined approach for the USD while pushing for big spending, taking advantage of low interest rates. Virus worries continue, with Germany registering record number of Covid-19 deaths as they tightened curbs, favoring stronger demand on the safe-haven with 1860 and 1870 as closest resistance targets.

USOIL –  WTI Crude printed higher, breaching our resistance targets at $52.60 and $53 despite IEA revising global demand outlook down by 280Kbpd to 96.6Mbpd in 2021 with the biggest reduction in 1Q21 by 580Kbpd. Investors remained focused on big spending plans out of the US while technicals indicate fading bullish momentum with $53.50 key resistance level to direct today’s session, favoring a pullback lower with $53 as the closest support target.

 

 

 

 

Rony Nehme

Rony Nehme

Chief Market Analyst at SquaredFinancial

Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.

 

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