Intraday Market Thoughts Archives

USD weakness extended anew as the ECB leaned towards guarded optimism in Thursday's meeting. ECB policy makers continue to be more pre-occupied with the deflationary obstacles to recovery. Earlier this week, policy makers at the BOE and BoC highlighted that the fate of accumulating personal savings were vital to the economic outlook once the pandemic has passed. On Wednesday, Ashraf posted the below chart to the WhatsApp Broadcast Group, highlighting a possible recurrence of the Dec 8 peak, which triggered a $50 drop pullback before later bouncing towads the 1950s. Stay alert. 

The combination of stay-at-home orders and government handouts has left many consumers with swollen balance sheets. In normal times, you would expect that to lead to a boom in consumer spending but central bankers are cautious about the timing and nature of that spend.

Surely there will be some celebrating when it's all over and travel will temporarily boom but it's not clear whether it will all be spent, or how quickly. It's possible the pandemic leaves consumers more cautious but it's equally plausible that they end up spending more than ever before.

Where exactly that level of spending falls was highlighted as the key post-pandemic x-factor by the BoE's Bailey and BoC's Macklem on Wednesday and the market will no-doubt be watching how that develops.

It's still far too early but in a few months, we will start to closely watch pent up spending and sentiment data in the UK and US. Another spot to watch closely will be Israel, which is on track to be the first country to fully vaccinate and re-open. How consumers behave there will be a strong clue on what's coming elsewhere.

Lagging behind in the recovery will be the eurozone, in part due to a slow vaccine rollout. The statement from the central bank was essentially unchanged and Lagarde repeatedly emphasized that QE would continue until at least March 2022. She also offered jawboning by saying the rising euro is a drag on inflation.

The press conference helped to stall the euro's rally but the scope for further cuts everywhere is fading so dovish talk will have a diminishing effect. The next big question will be who tapers first.

US dollar is well off its highs after Janet Yellen reiterated the importance of allowing market-determined exchange rates and sticking with the status quo order of FX dynamics.  The fact that she did not reiterate the long-touted "strong USD policy" expressed since the mid 1990s may allow for further decline in the greenback. Elsewhere, CAD dropped to start the week on a report saying Biden will halt the Keystone XL pipeline but more than actions themselves, the market will be looking at Biden priorities domestically and abroad early in his term. The chart below dissects EURUSD futures positioning into gross longs and shorts, highlighting the direction and similarity/dissimilarity between now and 2018. 

Biden had promised to halt the Keystone XL permit in his campaign so it doesn't come as a big surprise and shares of the pipeline operator itself only fell 4%. So it was an overreaction to see the loonie down 40 pips early in the week and it later halved the decline.

More than the loss of export capacity, we'd argue that signals from Biden are more meaningful. Trump deeply strained relations with many allies including Canada. Repairing those is assumed to be a Biden priority but such quick action against a key Canadian project suggests that might not be the case.

One thing to watch will be where Biden decides to visit first. In-person diplomacy is on hold because of the pandemic but there's a deep symbolic value in a Presidents first visit. For generations, Presidents visited Canada first but George W Bush broke that streak with a visit to Mexico. Trump's first stop was Saudi Arabia and that signaled a shift to a pro-Saudi, anti-Iran stance.

All of Mexico, Saudi Arabia and Iran will be waiting for early signals on what Biden's trade priorities will be.

Of course, the largest trading relationship in the world is the US and China and that's the critical question for global growth in his term. Politically, it would be impossible to undo all of Trump's moves but China will surely offer an olive branch. Ultimately, it will be the most-difficult dance of his Presidency and a tough one to predict.

It's a holiday in the US and metals are recovering after opening sharply lower in Asia on a broad USD rally, triggered by comments regarding Yellen's likely USD stance (see below). A 'sell the fact' mood hit markets last week after Biden's big stimulus and Friday's retail sales report was a reminder of how much heavy lifting governments are doing. The pound was the top performer last week while the kiwi lagged. CFTC positioning data shows that USD shorts aren't losing their nerve despite the recent bounce. We turn to Yellen's Senate Hearings tomorrow. Below is the net short-positioning of DXY. 

The US is on holiday Monday so that may slow the start to the trading week. The main event this week is Biden's inauguration but barring something unforeseen like the Capitol riot, it won't be a market mover.

The holiday gives us a chance to digest the huge stimulus proposal and the market's reaction. So for the political reaction has been relatively positive but with Trump's impeachment on the agenda, clear signals have yet to emerge.

What did emerge on Friday was a poor retail sales report, down 1.4% in December compared to a flat reading expected. Worse yet, the prior was revised lower to -1.4% from -1.1%. There was an even larger miss and negative revision in the key 'control group' measure.

Two soft months from the US consumer at the most-critical time of the year suggest that stimulus is a bigger part of the equation than many market participants would like to admit.  

Early in the week, we will continue to evaluate the mood in the market. Treasury yields have retraced but the dollar has remained strong but that may be due to soft softness in equities and US-China friction. This week should offer a clearer picture on the underlying trends.

Aside from comments from Biden, Treasury Secretary-nominee Yellen will appear in the Senate on Tuesday. She will testify that the US won't seek a weaker dollar, leaving it to the market.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +156K vs +143K prior GBP +13K vs +4K prior JPY +50K vs +50K prior CHF +12K vs +9K prior CAD +12K vs +14K prior AUD +5K vs -4K prior NZD +15K vs +12K prior

US dollar shorts are edged higher this week with AUD flipping back to a net long, meaning futures speculators in every major currency are short the dollar.