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Last week’s news

• Joe Biden hailed the resilience of the US democracy and appealed for unity in a polarised nation as he was sworn in as 46th president, completing an eventful transfer of power that was marred by the deadly attack on the Capitol. During his inaugural address last Wednesday, he did not mention Donald Trump by name, but said the foundations of the country’s political system had been tested by his predecessor’s refusal to concede defeat. At 78 years old, Mr Biden is the oldest incoming US president ever – and he will be joined in governing the country by Kamala Harris, who will serve as the first female, first black and first Asian-American Vice-President. She was sworn in by the Supreme Court Justice after Lady Gaga sang the National Anthem.
• Large UK companies have complained to the UK government that millions of pounds worth of support is being blocked after a decision to stick with certain EU state-aid rules even though the UK has officially left the trading bloc. Businesses say they have been locked out of the government’s £4.6bn emergency COVID-19 grant scheme announced this month, leaving jobs hanging in the balance. Last year the UK government agreed that individual companies would not receive more than €4m each in grants to deal with COVID-19, after signing up to the European Commission’s state-aid temporary framework. With many companies now reaching that limit, business owners are demanding why the UK government are sticking to that limit despite not being in the EU bloc anymore.
• The gloomy outlook of eurozone business activity has deepened further according to the latest economic readings, adding to the evidence that tighter restrictions to contain rising coronavirus infections are dragging the bloc towards a double-dip recession. The flash Composite Purchasing Managers’ index for the eurozone dropped to 47.5 in January, its third consecutive month under 50. The darkened outlook has grown since several countries such as Germany and the Netherlands tightened lockdowns in recent weeks to contain the pandemic, leading economists to forecast a fresh economic contraction this winter. Chris Williamson, chief business economist at IHS Markit added ‘a double dip recession for the eurozone economy is looking increasingly inevitable as tighter COVID-19 restrictions take a further toll on businesses in January’.
• Canadian Prime Minister Justin Trudeau was disappointed over Biden’s decision to cancel a permit for the Keystone XL pipeline, a major Canadian project that would have brought more than 800,000 barrels of oil from the western province of Alberta to the state of Nebraska and onward to US refineries on the Gulf Coast. Biden has already started to work on his campaign promise to strengthen environmental regulations in the US. In Canada, Trudeau is facing pressure domestically to stand up to Canada’s largest trading partner. Trudeau said, “To workers especially in Alberta and Saskatchewan who’ve been hit hard, we will continue to have your backs. We will always stand up for good Canadian jobs.”
• AUD outperforms most currency peers as the trading week gets underway in Sydney with domestic border restrictions poised to be lifted before being capped off near weekend in its bull run by China’s drop-off in Chinese iron ore demands.

Looking ahead

• It will be very interesting to hear Jay Powell’s speech this week after the FOMC rate decision on Wednesday. US treasury bonds might provide an excellent clue about the direction of FX market “risk on” and “risk off” currencies and the equity market. Particularly, bonds might sell off if Jay Powell does not provide assurance that the Federal Reserve’s $120 billion of monthly purchases will continue in the foreseeable future. Sophisticated market participants expect that the Fed and Powell won’t disturb the US treasury market, equity market, or the FX market (i.e. evident via low volatility of interest rates, stocks, and the FX market). However, if Powell doesn’t support the status quo on bond-buying, there may be negative sentiment in all the asset classes mentioned above.
• Joe Biden forecast last Thursday that the coronavirus will have killed half a million people in the US by the end of next month as he warned that his administration would not be able to dramatically accelerate the pace of vaccinations. He added that ‘we didn’t get into this mess overnight. It’s going to take months for us to turn things around.’ He further admitted that ‘the brutal truth is it’s going to take months before we can get the majority of Americans vaccinated’ suggesting that the pandemic is not going anywhere anytime soon. Dr Fauci, chief coronavirus advisor, admitted he felt a sense of relief to be operating under a new president, having been sidelined and publicly criticised by Mr Trump previously.
• The euro held gains against the US dollar amid news that the European Central Bank was seeking new gauges to inform its stimulus debate. The euro ended last week with a 0.74% increase against the US dollar. The ECB’s monetary policy statements said its pandemic bond-purchase program need not be used in full should favourable financing conditions be maintained.

Key market events this week

• Wednesday
  
  • AUD Inflation Rate YoY (Q4)
  • USD Durable Goods Orders MoM (Dec)
  • FOMC Interest Rate Decision
• Thursday
  • USD GDP Growth Rate QoQ (Q4)
• Friday
  • MXN GDP Growth Rate YoY (Q4)
  • USD Core PCE Price Index YoY (Dec)
  • USD Uni of Michigan Consumer Sentiment & Index (Jan)