Morning Commentary: The Year So Far

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

The Year So Far Share this story: Andrew Kositkun Senior FX Advisor

2021 started with a strong consensus that last year’s trends would continue, if not accelerate. Last year, risk assets rallied on strong macro policy support and expectations that the COVID-19 shock would be temporary. Risk-on and U.S. dollar weakness were the main G10 trends in FX. Furthermore, vaccine developments late last year reinforced the market’s expectation for a strong global economic recovery in 2021 as macro policies remain supportive. All in all, a strong rebound of the global economy and a dovish Federal Reserve were seen as a recipe for further U.S. dollar weakness.  However, with just a little over one month in the books, this strong consensus is already facing challenges, with the markets showing signs of adjusting and looking at more individual currency drivers rather than just trading on risk sentiment and the U.S. dollar.  The first big change has been in the Fed’s tone. Last year, the Fed was unequivocally dovish. However, a number of Fed speakers did start to talk about tapering in early January. Since then, the Fed has pushed back firmly on such rhetoric, but mixed communication suggests that the Fed normalization, while not imminent, is closer than what was previously expected.  The economic outlook has also become more uncertain compared to initial expectations.  New and more infectious COVID-19 strains and a slow start to vaccinations, particularly in Europe, have pushed back the timetable on when countries around the world were hoping to move out of lockdowns. This likely means that severe lockdowns should remain in place for all of the first quarter, and possibly longer, as the more infectious COVID-19 strains and slow vaccinations should lead to a more gradual removal of restrictions this year and delay the move back to normality.  On the positive side, U.S. fiscal policy is now more supportive. Last December saw the U.S. add another $900 billion in stimulus on top of already historically large support. Since then, the Biden administration has proposed another $1.9 trillion in spending, with further spending expected to come through an infrastructure package later this year.  Even if negotiations weaken the total amount of Biden’s fiscal proposal by 50%, the total amount of pandemic fiscal support in the U.S. will still be roughly three times that seen in Europe and will be spent now as opposed to over seven years, as is the case with Europe’s response.  As such, the U.S. dollar’s response to such massive fiscal stimulus is not as straightforward anymore. Last year, fiscal stimulus was positive for risk and negative for the U.S. dollar. This year, massive fiscal spending increases the risks for earlier-than-expected Fed normalization which has a supportive impact on the U.S. dollar.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Non-deposit investment products: • Are not FDIC insured, • Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and • Are subject to investment risks, including possible loss of the principal invested. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2021 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC