The inauguration of the 46th President of the United States went off without a hitch. Equity and currency traders welcomed the new administration with fresh records for the S&P 500 and NASDAQ. The peaceful transition allowed investors to turn their focus to President Joe Biden’s 100-day agenda, which includes aggressive promises for more stimulus and broader vaccine distribution – the two most important ingredients for a 2021 recovery. The greenback sold off against all of the major currencies with the exception of euro and Swiss Franc because more spending and a larger fiscal deficit is bearish for the dollar.
Worries that the European Central Bank could jawbone the currency or talk of the need for more stimulus prevented euro and the Swiss Franc from participating in the risk rally. No one expects the ECB to boost asset purchases, having just done so in December. When it last met, the central bank increased asset purchases by $500 billion and extended bond buying to March 2022. It also lowered 2021 growth forecasts. Since then, new coronavirus strains and rising cases forced countries across the Eurozone to extend their lockdowns. However, data hasn’t been terrible with industrial production, ZEW and PMIs holding steady. Inflation, on the other hand, remains very low, with HICP dropping to -0.3% on a year-over-year basis in December, far below its 2% forecast. Consumers, businesses and investors are hopeful that with further vaccine distribution, they’ll round the corner.
The ECB will take all of this into consideration when it meets tomorrow. It will leave interest rates and its asset-purchase program unchanged. It will talk about a strong post-COVID-19 recovery while expressing concerns about the impact of restrictions on near-term economic growth. The big question is whether ECB President Christine Lagarde will jawbone the euro. Last week, she said “we monitor very carefully the FX movements, don’t target it.” Some argue that Europe’s hope for better relations with the new Biden Administration will deter it from talking down the currency, but we’re not sure if that impacts her decision. The strong euro is a problem, but keeping the door open to more asset purchases if there’s further weakness could in many ways achieve the same goal of easing demand for the currency.
Like the ECB, the Bank of Japan is also expected to keep monetary policy unchanged, but the difference here is that the BoJ could downgrade its economic assessment and economic projections. Ravaged by a second wave of coronavirus cases, the government expanded its state of emergency to cover seven more areas, encompassing more than half of the country’s GDP output. Although none of that seemed to matter for Japanese Yen traders, who drove the currency higher versus the euro and U.S. dollar.
Meanwhile, the Canadian dollar was the day’s best-performing currency. Although consumer price growth slowed in the month of December, the Bank of Canada looked past the economic impact of COVID-19 restrictions to the recovery. The central bank said the resurgence in cases is a serious setback that will cause Q1 growth to turn negative but “beyond the near term, the outlook for Canada is now stronger and more secure than in the October projection, thanks to earlier-than-expected availability of vaccines and significant ongoing policy stimulus.”
This upbeat outlook drove the Canadian dollar to its strongest level versus the U.S. dollar since February 2018. The Australian and Australian dollars also powered higher ahead of Australia’s labor market report. Sterling was boosted by stronger inflation.