December 08, 2020 (MLN): With a dollar’s sell-off, the currencies Euro, Sterling, Swiss franc, Australian, New Zealand and Canadian dollars soared to multi-year highs over the past few weeks.
Although the greenback against most currencies continued to fall on Monday, BK Asset Management sees more two-way action as investors look to take year-end profits on a short dollar position. The US macroeconomic weekly calendar has nothing much with the exception of inflation figures wherein higher fuel cost is expected to push up prices, but inflation in the United States is very low, so an uptick will have zero effect on Fed policy.
With that said, as per the report, investors could find a strong number for short-term dollar covering.
Instead, the research report has eyes on the stock. The Dow Jones Industrial Average pulled back after climbing to record highs last week, while the Nasdaq extended its gains. If stocks enter a deeper correction, the greenback can get a safe-haven bid.
This week will remain in focus as the physical meeting between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen is going to be held over the next few days wherein investors hope it will yield some positive results. However, both held the highest levels of Brexit talks yesterday and unfortunately no agreement was reached.
The UK government also offered to withdraw parts of its local market bill, which counteracts the Withdrawal agreement if a trade deal is reached this week. This olive branch gave hope to the Brexit deal.
Nevertheless, both sides are adamant on three important issues; fishing rights, enforcement of governance of the agreement and a level playing field so it remains unclear if a deal is really within reach. Regardless, expect some serious volatility in sterling (GBP) this week, the report said.
While the stronger-than-expected German data keeps the EUR/USD pair near 2.5-year highs, the report expects profit-taking before the main event i.e. European Central Bank (ECB)’s monetary policy announcement. The ECB made their intentions very clear, giving investors plenty of time to discount their move. However, they won’t be happy with the 3% rise in EUR/USD since November and the upsurge in virus cases abroad.
The covid-19 Vaccine is here but it is not going to change the world right away as dissemination won’t be quick enough to avoid more deaths. The ECB President Christine Lagarde long ago anticipated more easing to support the Union’s economy amid pandemic. The report revealed the ECB is expected to ease but they are also likely to leave the door wide open for additional measures.
Of all the major currencies, the report believes that the Australian Dollar (AUD) is the most vulnerable to a correction. The data has been good and they have beaten the second wave of COVID-19, but tensions with China are growing as China suspended Australian beef imports. This is followed by up to 200% tariffs on Australian wine, blocked imports of Australian lobsters and delays on coal imports. It is prudent to mention that these are Australia's most important exports to China. The Canadian dollar also lost ground on soft manufacturing growth. The IVEY PMI index fell from 54.4 to 52.7. while economists were expecting an improvement of 54.7. The most worrying part of the report was the employment component, which fell from 50.3 to 48.1 – implying that job growth in December would be very weak, the report added.
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