Supply chains under pressure
Morning mid-market rates – The majors
11th January: Highlights
- Negative rates to hit savers long-term futures
- Covid ravages jobs market
- Doom loop will provide no help to the economy.
Vaccination programme under pressure but delivering
It has been a feature of the Government’s tactics since before the election at the end of 2019 regarding Brexit, it continued through the first lockdown and has now reappeared over Coronavirus vaccinations.
There is some doubt over its ability to deliver on a promise to vaccinate every member of the four most vulnerable groups by the middle of next month and now, to provide every adult who wants a jab with one by the Autumn.
With positive tests at levels last seen last spring, deaths at record levels and the NHS close to being overwhelmed, the Health Minister has appealed to the public to adhere to the rules while a reluctance remains to tighten restrictions.
There is also a reluctance at the Bank of England to drop interest rates again, this time into negative territory.
The jury is out on the effect of such a move and two MPC members Silvana Tenreyro and Ben Broadbent will make speeches over the next couple of days in which it is likely they will update their views on negative rates.
Tenreyro has spoken in the recent past about being encouraged by the results of modelling the effect of negative rates and has also voiced concerns about the economic effect of the vaccines until a significant proportion of the population has been inoculated.
Last week the pound was mired in a relatively narrow range. Concerns over the movement of goods between the mainland and Northern Ireland remain and there have been significant delays with firms in the supply chain due to their inability to comply with new documentary requirements in a timely fashion.
There is still a degree of confidence being provided by the rollout of vaccinations, but the Government needs to ensure it produces on its promises if the concerns that are also being voiced are not to be realized.
Sterling traded between 1.3704 and 1.3532 closing at 1.3562, although it has started the new week on the backfoot falling overnight to a low of 1.3491
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Dollar rallies despite poor data
Friday’s release of the December employment report saw headline non-farm payrolls fall into negative territory for the first time since the early days of the first wave of infections.
140k jobs were lost in December following an upwardly revised gain of 336k in November. The revision from 245k was one of the only bright spots in the entire report.
The unemployment rate remains at 6.7%.
Several FOMC members will speak this week and while the election of Joe Biden together with both Houses turning Democrat does not provide a blank cheque, most are expected to either note the need for further stimulus or actively call for action to be taken.
The employment data was a major blow to risk appetite, the single most important factor currently for the strength or otherwise, of the dollar index.
On Friday it rose to a high of 90.24, closing the week at 90.04. The sight of an extremely poor employment report and the dollar rising to its highest level in a couple of weeks will have added a level of confusion to traders. However, hope remains that once those who want to be vaccinated receive the jab, the markets will become a little more predictable in their reactions.
There remain calls for President Trump to be impeached for his role in inciting the riots which took place last week culminating in a mob storming the Capitol building.
There has been universal condemnation of his actions and he is now permanently banned from Twitter and remains suspended by Facebook. So, it remains that the man with his finger on the nuclear button cannot be trusted to run a social media presence.
Inflation data will be released this week. While it is expected to remain at 1.6% year on year, there are mutterings about a medium-term rise in prices which could become an issue for the Fed.
Can the euro muddle through?
This was what drove the start of the financial crisis in the region close to fifteen years ago.
The ECB is willing to purchase almost infinite amounts of the region’s Government debt in order to add liquidity. The use of that liquidity by banks has led to what is being considered a risk-free trade. With corporate lending still depressed, banks do not wish to return excess liquidity to the Central Bank and pay for the privilege, due to negative interest rates, of doing so.
Thus, a doom loop is developing where countries, in particular Italy and Spain, are racking up close to unsustainable levels of debt.
There has been some mention over the past couple of months that Italy is going to try to force the ECB to either forgive a portion of the debt it owns or accept the maturity of the bonds as without expiry.
There were several data releases last week which either showed that the fall in the economy is slowing, activity reports were still in negative territory but improving, or there was a marginal improvement as the unemployment rate fell from 8.4% to 8.3%.
The rate of delivery of the Coronavirus vaccine remains well below that of the UK with France and Germany, in particular, struggling for supply. By Friday, France had vaccinated just under 50k recipients.
The euro fell last week as risk appetite dipped after the Washington riots and the poor U.S. data.
It reached a low of 1.2193, closing at 1.2226. Overnight, it has remained weak, opening at 1.2182 and falling to 1.2166.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”