Morning Brief – Two hands on the wheel

Two hands on the wheel

Either the result of a calendar mixup or just a series of unavoidable events, the week ahead is packed with risks that will dominate foreign exchange flows. President elect Joe Biden’s inauguration will take place in Washington on Wednesday. This week members of the European Council, the EU’s executive arm, will also meet. If that wasn’t enough, no fewer than four of the G10 currencies have a monetary policy decision or announcement due this week. All of these events, in conjunction with the less than certain times we live in, should prove to unsettle markets and drive up demand for safe havens. This will create risks as well as the potential for rewards across the foreign exchange market.

Yesterday the market saw heightened and renewed demand for safehaven assets creating direct and indirect flows in foreign exchange. As a result of a flight to safety the world’s largest and most liquid currency, the US Dollar, rallied from a defensive market bid. Other classic safehavens including the Japanese Yen rose in value as investors sought protection from expected volatility from this week’s events. Commodity and emerging market currencies lost some traction as the reflationary cycle took a breather to account for this week’s great number of episodic risks. We could rightly expect these trends to continue to gather pace throughout the remainder of this week as markets continue to be defensive, wary of the potential for widespread change at each scheduled event.

Top of the list of risks is this week’s Presidential confirmation. We have already learned of the heightened security due at the Capitol for Biden’s inauguration. As a result of the violence witnessed last week at least 25,000 members of the national guard will secure the streets of Washington to ensure a smooth transition of power. As a result of a ‘small fire’ yesterday the entire complex was put into temporary lockdown with lawmakers inside told to stay away from external windows and doors. The tensions therefore could not be higher moving into the inauguration, pushing investors into less risky assets.

The EU Summit too will be of particular importance given the scope of potential and planned discussions. With Italy’s Prime Minister teetering on the brink of resignation, the European Recovery fund still facing problems and the vaccination program all up for collective change, risks behind the Euro are mounting too. The ECB is also one of those central banks in the G10 currency space making a decision this week. Given the Euro’s persistent advance the market is still wary of the damage Lagarde and her Board could do with passing comments about the single currency’s strength.

Whilst less is expected from other central banks hosting decisions this week, including banks behind the currencies NOK, JPY and CAD, the overall picture of risks is daunting. This has been driving the wider market to take protection behind USD at the expense of riskier currency holdings. This market positioning and a focus on individual currency pairs will reveal market opportunities as this week unfolds. Our desk would be glad as always to talk you through how to maximise your exposure to these potentially market moving events.

Discussion and Analysis by Charles Porter

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