Today's FX Comment

December 15, 2020

Good morning. Its great to be back after an extended long weekend- I have to use up those wellness days before the end of the year!

In my absence I really don't think the market themes have changed. There is optimism around the rollout of the covid vaccine but concerns about rising caseloads and lockdowns. There is light at the end of the tunnel but it will definitely be a long winter.

Brexit talks have extended past yet another deadline and depending on what reports you read, progress has either been made on the level playing field issue or no progress has been made a all.

Likewise, U.S. stimulus talks continue to drag on and it looks like the Democrats may give up state aid to get a deal done. Surely both sides must realize that million of Americans are suffering and face a pretty bleak winter without some added help. I think a stimulus deal is being more and more priced in by the market at this point, so if/when it does happen it will no doubt be a positive but the impact may be a bit more muted.

I think the only "new" news is that the electoral college did their job correctly and certified Biden's victory. I'm sure there was a sigh of relief from Democrats across America yesterday…

Equity futures are also breathing a sigh of relief and are pointing to a higher open, oil is a bit firmer while the U.S. Dollar is mostly weaker to start the session.

FX thoughts:

AUD - The Chinese economic data was decent and the RBA minutes were a bit more upbeat last night but both were overshadowed by ongoing Australia-China trade tensions. Australian PM Morrison has warned China that banning Australian coal would breach WTO and bi-lateral trade deals and has threatened to take China to the WTO over tariffs on barley. We all know China does not like being challenged like this so we'll see what the fallout might be. Ultimately, Australia has what China needs so while politics are hard to trade real demand isn't. While the two countries fight a war of words iron ore remains near the highs and I think we should now find bids around the 75 cent level in the Oz.

EUR - The Euro continues to trade in a tight range as the market weighs the positive - the most recent lockdowns have not had the same negative economic impact as the first round versus the negative - concern over the covid caseload and the prospect of more prolonged restrictions. Brexit talks are no doubt a drag as well. That being said, I think we'll continue find buyers on dips with 1.2215 the next topside target. 1.2060 is decent support.

GBP - The employment data out of the UK was decent this morning but let's not kid ourselves, only one thing matters right now and that is Brexit. Sunday's "deadline" came and went and on the plus side the EU and UK have agreed to keep negotiating, of course the negative remains they don't seem to be much closer to a deal yet. The UK House of Commons will apparently sit next Monday and Tuesday and this has given the glass half full types reason to be more optimistic about a deal, you know what I say - believe it when you see it. A deal and we're back to 1.3500 in a hurry and we could target 1.4300 if the overall risk backdrop cooperates, no deal and I think we see 1.2860 pretty quickly and a likely extension to 1.2640.

CAD - USDCAD isn't all that much changed since last week but I think the price action is pretty telling, the bounces continue to get shallower as the offers continue to creep lower. Support between 1.2700-30 continues to hold for now but it feels like it will give way on any kind of decent news (maybe a US stimulus package, maybe a continued push toward $49 in WTI, maybe a dovish sounding Powell tomorrow?). For now at least the path of least resistance seems to be lower as it still feels like there is a long USDCAD hangover capping the rallies.

The FOMC tomorrow will obviously be key, I don't expect the Fed to actually do all that much but do you think Powell will be anything but dovish sounding? He may manage to spur another round of U.S. Dollar selling.

Before that we'll hear from BOC Governor Macklem later this afternoon, his speech is "Trading for a Sustainable Recovery" – and of course we'll have to watch for any Canadian Dollar comments. Right now the good Governor is about the only person who could de-rail further currency strength. If he remains tight lipped on the Canadian Dollar the market will have the green light to keep selling Funds.

.Good luck.