Dollar rallies as monetary tightening comes into focus
The dollar’s blistering rally gathered speed last week as markets brought forward their expectations for Fed
hikes, while the European Central Bank’s aggressively dovish communications hammered the euro. Looking ahead, the US Treasury will sell an unusually large amount of bonds in auction, and it is not clear the nervous fixed income market will absorb this massive supply with ease after the recent sell-off in bonds and hawkish noise from Federal Reserve officials. The Eurozone indices of business activity for November are released on Tuesday, and will be the first read of the impact of recent COVID news on business confidence. On Wednesday the PCE inflation report and FOMC minutes are released. The news-packed week, combined with the lower liquidity associated with the US holiday, could make for some serious volatility.
The Czech koruna sold-off last week, with most of the depreciation taking place on Friday. In the past few weeks the currency proved quite resistant to stronger US dollar and prospects for US monetary policy tightening, but depreciated on concerns regarding lockdowns in Europe. The coronavirus situation in both Europe and Czechia is deteriorating. Last week, Czechia posted the highest number of new daily cases since the pandemic started. The 7-day moving average is approximately 15,000 at the moment of writing. We think those are temporary worries and don’t change our expectations regarding stronger koruna in the coming quarters. In the near term, the currency’s behaviour will most likely depend on external factors, particularly sentiment towards Europe. That being said, we’ll continue to focus on Covid developments within Czechia as it could be a reason for concern for investors.
The euro continues to plummet on both ECB pushback against rate hike expectations and negativity around yet another round of COVID lockdowns. A handful of countries in the bloc have imposed fresh restrictions, notably in Austria that has announced a full nationwide lockdown lasting a maximum of 20 days. The PMI releases this week will capture some of the impact on business confidence, and so will be closely watched by markets. News flow has not been kind to the common currency, but after the brutal sell-off of the past few weeks it looks somewhat oversold and may find a floor if ECB speakers this week do not sound overly alarmed by the COVID situation.
Federal Reserve officials made some hawkish noises late Friday, suggesting that the pace of the taper may accelerate and signalling that the FOMC is increasingly alarmed by inflation data. In addition to the PCE inflation data and FOMC minutes on Wednesday, right before the holiday, the auctions of Treasury bonds on Monday and Tuesday will be key to gauge market appetite for further US debt in a context of massive supply, diminished Fed support and massively negative real rates.