Weekly Market Update 05/04/21
Dollar dominates all
In the run up to Easter, the currency markets remained dominated by the familiar themes of vaccinations and infections, with a strong link between the vaccination programme's speed and the strength of the currency. As has been the case for the last few weeks, sterling has continued to perform strongly against the euro as Europe's vaccination progress is still encountering problems. The euro is also coming under pressure from internal political upheaval and an increasingly belligerent Russia on its eastern doorstep as it continues to vacillate over the €750bln fund that it agreed last year with the German Constitutional Court now questioning its validity. Meanwhile, President Biden has unveiled a $3tln package to rebuild America's infrastructure, and although it is unlikely to pass through the House without change, it's symptomatic of the divergence between the economies.
The Non-Farm payroll data released last Friday was much better than expected with just under a million jobs created. We have another holiday-shortened week ahead of us and we are unlikely to see the narrative changing too radically over the next few days. The movement of the dollar is likely to continue to dominate the markets and again we will be watching the US Treasury market closely to see whether yields continue to edge higher, especially this coming Friday after the US Producer Price Index is released. With Christine Lagarde telling investors that the European Bond market will stay under the ECB's control, the yield differential between Europe and its key trading partners is likely to widen, adding yet more pressure to that already weighing on the euro.
Sterling continued to edge gradually higher against the euro last week and has opened at just below €1.1800 this morning, having had its best quarter against the single currency since 2015. The first easing of the lockdown restrictions and the UK's tentative steps to recovery are in sharp contrast to further restrictions being imposed in France. For some time, sterling has benefited from a vaccine dividend and looks set to continue to do so. The pound has broken up through some key technical resistance against the euro and some investors are looking for sterling to move up towards the €1.20 level over the next few months. Whilst the pound is vulnerable to the resurgent dollar, it is trading relatively strongly to the rest of the G10 currencies and has opened above $1.3900 this morning. With little on the data horizon apart from Construction PMIs on Thursday, a relatively quiet week is in prospect.
The euro looks set to remain in the doldrums as its vaccination programme continues to lag both the US and the UK and its political problems mount. With the US looking at another fiscal stimulus package, Europe’s €750m response is still not implemented and it faces another challenge by the courts shortly. With little on the data front this week it's hard to see the negative narrative changing. Its problems will be brought into focus when unemployment for the Eurozone is released on Tuesday. The only other noteworthy data sets are the continent-wide Purchasing Manager's Indexes released on Wednesday. Apart from that, the minutes from the last ECB meeting are released on Thursday which we will study for hints on how widespread the support for the recent expansion Pandemic Emergency Purchase Programme (PEPP) has been.
After the non-farm payroll data reported that nearly one million people found employment in the last month the strength of the US recovery is gaining pace. If this continues then all those that lost jobs during the pandemic will be reemployed within a year. The implementation of President Biden’s “Build Back Better” recovery plan will help this recovery, and the challenge now for him is to see how much of his plan he can get approved. The significant events in the week ahead will be the release of the Federal Open Market Committee minutes from its March meeting, which should reinforce the Fed's dovish tone and its willingness to leave the US Treasury market to its own devices. The Chairman of the Federal Reserve, Jerome Powell, has an opportunity on Thursday to further express his views when he addresses the IMF along with several other speakers from the Fed. However, his commitment to full employment is unlikely to waiver. On the data front, the weekly employment data is released on Thursday, which we will be watching for confirmation of the recent jobless trend. On Friday, analysts and traders will be studying the Producer Price index for March for inflationary trends, any sign of which will lead to a further rise in yields and the dollar.
The Swedish krona started the month of April by weakening during what was a half trading day with thin liquidity as the nation prepared for Easter. April has a mixed track record, but Q2 is historically speaking a Swedish krona positive quarter. Vaccinations remain sluggish and it appears as if the roll-out has been somewhat halted as the Swedish government is no longer offering the Astra Zeneca jab to the under 60’s. Other things to pay attention to this quarter will be the inflation rate together with the various manufacturing and industrial production figures which will serve as an indicator of how well Sweden’s economy is adapting to a new, hopefully re-opened world. This week kicks off with the Swedbank PMI Services data out today, the Industrial Orders figures released on Thursday and the GDP Indicator and Budget Balance out on Friday.
The Norwegian krone starts trading today for the first time this month as Thursday last week was a Public Holiday. It strengthened throughout March and was briefly under the psychologically important 10.0000 level before month end. This week carries a lot of important data, including the DNB PMI Manufacturing data out today, the Industrial Orders for February on Thursday and the Inflation Figures out on Friday. The latter are expected to sit right above the 3% mark which many market commentators suggest will spur further rumours of a rate-hike by Norges Bank Governor Olsen even before the summer. Should this materialise, Norway would be the first G10 country to raise interest rates since the Covid19 crises began.