More ups than downs

<p>A <strong>reflation trade</strong> is finding a foothold, joining <strong>vaccine</strong> inspired risk-on flows to drive sovereign yields higher. Treasuries have led the charge with the 1.75% 30-year yield the highest since March. The selloff was exacerbated Friday by the tepid increase in <strong>payrolls</strong> that boosted expectations for fiscal relief. Solid gains in average hourly earnings and the dip in the unemployment rate weighed too, especially as the <strong>FOMC</strong> will allow inflation to run hot. Meanwhile, the equity rally continues with Wall Street at new highs as promising vaccines developments overshadow rising virus cases and more stringent lockdowns.</p>
<p>Amid that background, attention will be on the <strong>ECB.</strong> But those looking for another easing bonanza are likely to be disappointed. <strong>Brexit</strong> is also a focus. There’s also a busy data slate in Asia where Chinese reports should further confirm the recovery is broadening.</p>
<p>The US calendar will play second fiddle with just CPI and Treasury supply of much interest. <strong>At the meantime US stimulus deal hopefully on track for action near term</strong>. Negotiations continue on the bipartisan $908 bln deal and Bloomberg reports details could be forthcoming today. There’s talk of $300 bln for small businesses, $180 bln for unemployed workers, and $160 bln for state and local governments. A couple of major sticking points are cash to individuals with another $1,200 checks supposedly not on the agenda, which the Democrats want, while the Republicans balk at the aid to states. The GOP is also arguing for a liability measure. There are plans to attach a relief bill to a stop-gap spending bill, which is needed by Friday to keep the government running.</p>
<p>In <strong>Canada</strong>, the Bank of Canada’s announcement (Wednesday) is the focus this week. However, it e<strong>xpected to be an as-expected affair,</strong> with no change in the 0.25% rate setting alongside a reiteration of their commitment to hold rates at 0.25% into 2023, which is when “economic slack is absorbed so that the 2% inflation target is sustainably achieved.”</p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_16-25-35.png"><img loading="lazy" class="wp-image-193946 aligncenter" src="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_16-25-35-1024×732.png" alt="" width="537" height="384" srcset="/wp-content/uploads/2020/12/2020-12-07_16-25-35-1024×732.png 1024w, /wp-content/uploads/2020/12/2020-12-07_16-25-35-300×214.png 300w, /wp-content/uploads/2020/12/2020-12-07_16-25-35-768×549.png 768w, /wp-content/uploads/2020/12/2020-12-07_16-25-35-696×497.png 696w, /wp-content/uploads/2020/12/2020-12-07_16-25-35-1068×763.png 1068w, /wp-content/uploads/2020/12/2020-12-07_16-25-35-588×420.png 588w, /wp-content/uploads/2020/12/2020-12-07_16-25-35.png 1163w" sizes="(max-width: 537px) 100vw, 537px" /></a></p>
<p><strong>USD</strong><strong>CAD has found a footing</strong>, and may be in for a relatively sustained rebound after posting a 26-month low at <strong>1.2770</strong> on Friday. It bounced to <strong>1.2833</strong> highs as<strong><span> Oil prices</span></strong> were pushed lower by a Brexit related wave of risk-off. Crude prices have since moved off their lows, allowing <strong>USDCAD</strong> to dip back below the <strong>1.2800</strong> mark. The Greenback revealed a slightly higher bias overall, though has again come under pressure since Asia trade. <strong>Oil prices and overall USD direction will continue to drive USDCAD.</strong></p>
<p>USOIL opened the Asian session at <strong>$46.25</strong> highs, then traded in a narrow band into the London open. From there, reports that the<span><strong> EU-UK  trade talks may be in trouble again, saw the backdrop shift to risk-off</strong></span>, which resulted in crude prices tumbling to <strong>$45.36</strong> lows. Prices have since recovered slightly.</p>
<p>Oil prices have softened after reaching a nine-month peak on Friday, and there may be more to go in this theme. While the bigger picture prospects remain bullish for oil and oil-<strong>correlating currencies</strong>, such as the Canadian dollar, the nearer term looks more challenging. Oil supply is on the up, with <strong>Libyan supply</strong> going back to pre-blockade levels, <strong>Norway</strong> having announced a rise in output, and the <strong>OPEC+ group</strong> having announced a 500k barrels per day increase from January. There are also signs that OPEC dissent is increasing, as highlighted by a Chatham House last week, with multiple participants in the output quotas unwilling to comply any longer. There is also expectations that <strong>US president-elect Biden will reduce will lift sanctions on Tehran</strong>, which would see Iranian output increase. All this comes amid increasing <strong>Covid-related</strong> restrictions across North America, and with Europe is maintaining restrictions. While<strong> Covid vaccination</strong> programs have started in Russia and will start in the UK this week, and in the US as soon as next week, these won’t have much impact in alleviating restrictions over the northern hemisphere winter.</p>
<p><a href="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_16-28-36.png"><img loading="lazy" class="alignnone size-large wp-image-193966" src="https://analysis.hotforex.com/wp-content/uploads/2020/12/2020-12-07_16-28-36-1024×750.png" alt="" width="696" height="510" srcset="/wp-content/uploads/2020/12/2020-12-07_16-28-36-1024×750.png 1024w, /wp-content/uploads/2020/12/2020-12-07_16-28-36-300×220.png 300w, /wp-content/uploads/2020/12/2020-12-07_16-28-36-768×562.png 768w, /wp-content/uploads/2020/12/2020-12-07_16-28-36-80×60.png 80w, /wp-content/uploads/2020/12/2020-12-07_16-28-36-696×510.png 696w, /wp-content/uploads/2020/12/2020-12-07_16-28-36-1068×782.png 1068w, /wp-content/uploads/2020/12/2020-12-07_16-28-36-574×420.png 574w, /wp-content/uploads/2020/12/2020-12-07_16-28-36.png 1169w" sizes="(max-width: 696px) 100vw, 696px" /></a></p>
<p>Nevertheless, even though OPEC’s decision to increase production modestly in January disappointed markets, prospects for Covid vaccines, and for a US fiscal stimulus package have limited crude’s downside potential. <strong>Friday’s 9-month high of $46.68 is a key upside Resistance.</strong></p>
<p>The scene looks to be set for a near-term correction in oil prices, which would see USDCAD’s directional bias shift from the downside to the upside for a period.</p>
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<p><strong>Andria Pichidi</strong></p>
<p><strong>Market Analyst</strong></p>
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