FX interventions make a comeback (Daily analysis 15.01.2021)

Global markets have been treading water for most of the week. Equity markets trade sideways with S&P500 remaining within a stone's throw from all-time highs; crude oil retraces from recent highs. The US Treasury yields continue to fade the corrective bounce enjoyed at the beginning of the week.

The EUR/USD pair depreciates but this week has been able to decline only by a mere 0.5 pct. The USD/JPY pair bounces lower from the 104.00 mark, and the GBP/USD exchange rate hovers close to 1.37 boundary. Emerging markets currencies such as the Mexican peso, the South African rand and the Russian ruble advanced significantly. In contrast, the Polish zloty underperformed due to the National Bank of Poland dovish stance and a formal introduction of FX intervention into its toolbox.

Similarly, the Swedish krona is hit by an announcement that Riksbank will sell SEK 5bn per month for the next three years to bolster FX reserves. The move is not aimed at stopping the krona's dominance. The Swedish currency was the strongest in the G-10 space last year and is perceived as the main beneficiary of reflation and an expected resurgence of global growth. Interestingly, monetary authorities in Chile and Israel pre-announced FX intervention schemes as well.

Biden goes bold as job market stress continues

The US dollar failed to benefit substantially from Joe Biden's announcement to boost fiscal expenses by a staggering figure amounting to USD 1.9tn. The package was nicked the American Rescue Plan and is focused on social transfers, namely income support and stimulus cheques. In the long term, the skyrocketing of US government borrowing should be perceived as a clear dollar negative. Fed's Chair Powell reinforced recent dovish Fedspeak. Extremely accommodative monetary policy stance and refraining from any tapering of pandemic tools should limit the US dollar's upside potential.

Today, market participants will be focused on US retail sales data as well as consumer confidence indexes which follow yesterday's worrying job market report. Initial jobless claims soared to 965k last week. The reading came in at a staggering 176k above the expectations. Moreover, continuing claims now amount to 5.27mn. Given that only 3 pct of Americans have been vaccinated so far and the epidemic situation remains unstable, no loosening of COVID-19 restrictions is in sight. Consequently, the stress in the job market will not abate soon.