Morning Report – 28 April 2021

FX Moves


After a few days of marginal gains, the pound returns to trading on the back foot as the dollar bounces back against the whole of the G10. Sitting 0.25% lower on the day so far this morning, sterling is one of the worst-performing currencies out of the G10, with only JPY, CHF and AUD suffering greater losses. Data released yesterday from the Office of National Statistics saw the profitability of the manufacturing sector drop to its lowest level for a decade, reflecting the impact of pandemic-related costs and Brexit friction on the corporate sector. The net rate of return, calculated as the profit on capital used in production, fell sharply in 2020 to 8.8%, the lowest reading since 2020. Meanwhile, the net rate of return for all private non-financial companies fell from 10.2% to 9.2%, while profitability in the service sector was relatively stable with companies averaging a net rate of return of 15%. For today, there is little on the calendar for the pound, with the sole data point already released just past midnight this morning. The BRC Shop Price Index saw prices rise from -2.4% in March to -1.3% in April.


After closing broadly flat on the day against the US dollar yesterday, this morning’s price action saw EURUSD briefly dip below this week’s lows following a combination of a stronger dollar and a disappointing GfK consumer confidence figure from Germany. The GfK index slipped to -8.8 vs an expected -4.2 and prior revised reading of -6.1, marking the first slip since February as household sentiment in Germany suffered more than in the eurozone at the start of Q2. Despite being negative on the net, the details for the German report this morning were more balanced than in prior months. Although the expectations index fell slightly, the willingness-to-buy index increased, extending a rebound that was set in motion in January. On the fiscal front, Germany and France laid out plans for billions in spending through the EU recovery fund aimed at fighting climate change and boosting the use of digital technology across the economy. French Finance Minister Bruno Le Maire stressed that the funds should start to flow to member states as early as July, as the US and China have recovered faster from the pandemic and “Europe must remain in the race”. In the background, euro investors will continue to watch headlines around the EU recovery fund today ahead of Friday’s deadline for all nations’ proposals, with the Italian plan set to receive final approval today or tomorrow. Beyond the GfK gauge, today’s economic calendar is unlikely to move the needle for the euro as other data points are of less relevance to markets. Sentiment may be helped by the first stage of easing lockdown restrictions in the Netherlands, however, as restaurants and pubs are now allowed to open their doors to receive guests outdoors from today onwards while non-essential retail shops may be visited without appointments again.


The US dollar traded within narrow ranges over the course of yesterday with the DXY index remaining in the middle of the weekly range, but this morning’s session saw the index rise above this week’s highs ahead of what is likely to be a non-event from the Federal Reserve. An extension in the dollar rebound would rely on a hawkish message from Fed Chair Powell tonight, however, with developments in financial markets broadly following expectations since the March meeting, today’s FOMC decision shouldn’t result in anything beyond a slightly more optimistic tone cast by Powell. The FOMC dot plot did a sufficient job at anchoring real rates across the curve, which allowed for the reflationary trade in markets to cool down and the DXY to drop by around 1% since the March meeting. The acknowledgement of vaccination milestones and strong economic data should not change Powell’s stance on inflation today, as he will likely stress that any uptick in inflation will be transitory of nature and a Bank of Canada-style QE tapering announcement is too premature for the Fed. Still, the US dollar may see increased price volatility throughout the Q&A session as journalists will try to squeeze a QE timeline out of the FOMC. The US 10-year inflation breakeven rate – a gauge of inflation expectations – topped an eight-year high of 2.4% this morning ahead of the meeting, as a stream of strong US data and soaring oil and metal prices point to higher inflation. Powell’s task tonight will be to keep reinforcing the dovish message to ensure that the inflation expectations won’t spill over to policy expectations, while any hawkish hints would be taken as USD positive by markets.


After climbing to near its three-year high posted back in mid-March on Monday, the loonie rally has stalled somewhat as markets revert back to the US dollar. While the commodity supercycle is preventing the loonie from taking on losses of a higher magnitude, along with favourable front-end yield spreads, the Canadian dollar is still marginally retracing some of Monday’s move. Speaking in front of the House of Commons Finance Committee yesterday, Bank of Canada Governor Tiff Macklem reiterated the central bank’s confidence in hitting the 2% inflation target despite their latest projections foreseeing inflation above target for 70% of the projection period. Macklem stated that inflation would naturally moderate as the output gap weighs on inflationary pressures, with inflation allowed to fluctuate between the BoC’s 1-3% tolerance band. The testimony by Macklem didn’t add much to what markets already knew and thus had little implications for yesterday’s price action. The Governor didn’t divulge much on the timeline for QE. For this, markets may have to wait until the 13th of May when Governor Macklem is set to speak at Atlantic Canadian Universities. Today, retail sales data for February is expected to show a stark rise from -1.1% in January to 4%, with core retails sales expected to rise from -1.2% to 3.5% at 13:30 BST. The data is set to reflect the impact the last economic reopening had on the economy, although the data may fall flat for markets as economic conditions have shifted substantially since February.


Source: Monex Europe