FX Update: Dissonance again in market narrative

FX Trading focus: difficult to square the action with background market narrative

Joe Biden’s Inauguration Day came and went with as much pomp and circumstance as possible, given the Covid restrictions, and equity markets perhaps celebrated the lack of public unrest, while the USD wilted as one would expect, given the surge of risk sentiment. Still, the narrative is tough to sustain when looking around the rest of the shop, as US treasuries were rangebound on the day despite the anticipation of tremendous stimulus in the pipeline, and generally unresponsive to the ebullience elsewhere.

And while the US dollar has responded as one would expect to the swell of enthusiasm in risky assets by weakening, momentum is flagging somewhat. Still, that is the “Goldilocks” rout for further USD weakness – too rapid an ascent in US long yields and that becomes a destabilizing factor, while a plunge in yields would suggest some collapse in confidence in the inflationary narrative. Given that the US treasury net issuance in 2021 will far exceed the current pace of the Fed’s declared QE purchase pace, US long yields deserve close watching on the theory that some price discovery remains in this market. For now, the only interpretation of a shoulder-shrug from bond markets in a context of a strong risk appetite is that the market sees liquidity and support without end, but no serious inflation threat. A bold bet!

Yesterday, the team and I posted a piece on the top ten priorities under a Biden presidency – five domestic and five foreign. On the domestic front, the chief immediate task is ensuring a massive vaccine roll-out effort and providing a safety net for the most vulnerable in the meantime. It’s a concern to see headlines on the struggle for vaccine distribution and whether new variants will prove resistance to vaccines (no ability to assess that risk, simply tracking it and crossing fingers on that front – the world will get post Covid lockdowns with or without a successful vaccine by this autumn.) I see today that Biden has activated the Defense Production Act to raise vaccine-, PPE-and other production efforts. This act allows the government to command any private production capacity it can identify along the lines of a war effort.

The US-China rivalry is already off to a hot start for the Biden administration after China sanctioned individuals in the Trump administration for their actions, a move that the Biden administration called “unproductive”. Already, China is asking for reinstatement of the listing of Chinese telecom companies on US exchanges, a first test of the Biden administration attitude toward China.

Chart: USDCAD
USDCAD was smacked lower by an optimistic Bank of Canada that sees a surge in activity resumption once the economy gets to the other side oof lockdowns. The actual affect on forward rate anticipation was virtually nil, but it novel to hear a central bank wax this optimistic and it took USDCAD to new cycle lows. The price action is not particularly pretty for the bears here, but barring another back-up, the formation of note. Two things the market glossed over in bidding up CAD yesterday were  Joe Biden’s revoking of the permit for the Keystone XL pipeline (key for Canadian tar sands production) and the Bank of Canada’s Governor Macklem bringing up some cautious wording on the strength of the loonie in the press conference. The next major zone lower is perhaps the 1.2500 psychological level, followed by the multi-year low below 1.2100.