EC March 2021 Monthly

(end of February 2021 indicative prices, previous in parentheses)

Spot: $1.2075  ($1.2135) 

Median Bloomberg One-month Forecast $1.2200 ($1.2145) 

One-month forward  $1.2085 ($1.2140)  One-month implied vol  6.8%  (5.7%)    


The rise in US yields helped lift the dollar to a five-month high against the yen last month (~JPY106.70). The yen is the weakest of the major currencies through February, off about 3.1% for the year. The Japanese economy appears to be contracting in Q1, but foreign demand, especially in Asia, is an important offset. In 2020, Japan recorded a JPY3 trillion trade surplus compared with JPY382 bln in 2019. Japan has been reported a trade deficit in January since 2010, but the JPY324 bln shortfall this past January was the smallest since the pattern began. The Bank of Japan has been buying ETFs for a decade and holds around JPY47 trillion (~$445 bln). It is the single largest owner of Japanese shares. The Topix reached its best level since 1991, the cost-benefit, given the distortions of small-cap issues, some modification seems increasingly necessary. Some detect a tactical shift recently that could also entail less frequent purchases but a larger average size. The rise in global bond yields has impacted Japan. The 30-year bond yield reached over 0.77%, the highest since late 2018, while and the 10-year matched its highest level (~0.18%), a five-year high. The 10-year break-even has risen to nearly 18 bp after finishing last year near 3 bp. Some observers expect the BOJ to widen the range that the 10-year yield can trade, from 20 bp on either side of zero to 30 bp, under its yield curve control policy. The central bank meets on March 19.    

Spot: JPY106.55 (JPY104.70)      

Median Bloomberg One-month Forecast JPY105.95 (JPY104.50)     

One-month forward JPY106.50 (JPY104.75) One-month implied vol  7.0% (6.3%)  


The British pound has dramatically benefitted from the reflation meme and the vaccine rolling out. Since the end of October (18 weeks), sterling has fallen against in only three weeks, including the last week of February. Over the span, it has appreciated by about 7.7%. Also helping the currency was the market's acceptance that the Bank of England was not going to adopt a negative interest rate and instead may hike them by the end of next year. The 10-year Gilt has risen by about 55 bp since the end of October, while the 10-year breakeven increased by around 25 bp. This suggests an increase in the real rate, unlike in Germany or the US. Some BOE officials, like some Fed officials, see investor optimism in the rising yields. However, the BOE chief economist warned that central banks may be complacent about inflation, and rates may have to rise to tame it. This will likely underpin sterling, even in corrective phases. Sterling is near its best level against the euro in a year, and this may also help minimize the losses against the dollar. If sterling's appreciation on a trade-weighted basis, some official comments cannot be ruled out.  With the labor market still stressed, the furlough program in which some 20% of the employees participate is currently set to end on April 30. Alongside this, the Chancellor of the Exchequer's budget on March 3 may provide other support for the hard-hit small and medium-sized businesses, which all told maybe 5%-7% of GDP. Sunak is expected to signal the intention of bringing fiscal policy under control, and the UK's corporate tax rate of 19% is the lowest in the G7. It is one of the areas that the Tories have not promised not to raise taxes.  

Spot: $1.3935 ($1.3710)   

Median Bloomberg One-month Forecast $1.3900 ($1.3695) 

One-month forward $1.3940 ($1.3715) One-month implied vol 9.1% (7.8%)

Canadian Dollar

 Last month and year-to-date, the Canadian dollar lagged behind the other dollar-bloc currencies' appreciation. Although its exports are weighted toward commodities, the positive impact may have been blunted by the Canadian dollar's greater sensitivity to the US NASDAQ. The Bank of Canada does not see the economic slack being absorbed until 2023 and is committed to keeping rates low until inflation is sustainably at its 2% target. The current wage subsidy ceiling (75%) may be lowered in April but will continue at least through June. The economy appears to be contracting in Q1, but a stronger second half is anticipated. It may not regain pre-pandemic output levels until 2022. Since the end of October, the 10-year bond yield has risen by about 75 bp, while the 10-year breakeven has increased by 68 bp. The rise in inflation expectations may explain the full increase in nominal yields. We suspect that the US dollar recorded an important low against the Canadian dollar in late-February and see room into the CAD1.2900-CAD1.3000 area in the coming weeks.  

Spot: CAD1.2740  (CAD 1.2780) 

Median Bloomberg One-month Forecast  CAD1.2730 (CAD1.2770)

One-month forward CAD1.2735 (CAD1.2800)  One-month implied vol  8.1%  (7.0%) 

Australian Dollar

The macro-themes of reflation, higher commodity prices, and strong Asian, and especially, Chinese demand converge in Australia. Iron ore, coal, and liquified gas account for more than half of Australia's exports. Since the end of October, the Australian dollar has appreciated by around 14.5%, and by some measures of purchasing power parity, it is overvalued. The OECD's PPP model has the Aussie when it is about $0.7700, overvalued by around 13%. The next important chart points are the 2017-2018 highs (~$0.8125-$0.8135), but we suspect an important high is in place and expect it to work its way lower toward the $0.7500 area in the coming weeks. The Aussie has appreciated by nearly 9% against the Chinese yuan, its biggest trading partner. In addition to competitiveness, it also more broadly highlights the strategic dilemma. Its economic prosperity has been linked to China's growth, while the key to its security lies in Washington. The upward pressure on global rates poses a challenge for the Reserve Bank of Australia that targets the three-year yield at 10 bp, the cash rate target in its expression of yield curve control. It may need to expand its bond-buying to achieve its target when it meets on March 2 to bolster the credibility of its stance, with the three-year note above the target at the end of February despite having stepped up its purchases.    

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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