EUR (1.211) ▲

▪ EUR rally above the 1.23 level in early January has been short-lived as the greenback has been on an ascent due to the pick-up in longer-dated US Treasury bond yields. The bloc's currency continues its pullback and closed lower in January attributable to the COVID-19 uncertainty and second round of Europe lockdowns.

▪ Despite the turbulent global risk environment and continuing COVID-19 uncertainty, EUR is expected to trade higher this month supported by a weaker USD as the Fed reiterated its dovish messages. However, any development on the US fiscal stimulus and ECB measures will continue to influence the pair’s direction.

GBP (1.369) ▲

▪ GBP closed relatively unchanged against the USD, even as England and Scotland entered new national lockdowns in January. Better-than-expected UK employment data and falling COVID-19 infections were unable to lift the sterling higher against the dollar’s modest improvement.

▪ GBP may trade higher this month, on the back of Britain’s ongoing vaccination campaign, potential US fiscal stimulus progress, and a weaker USD. However, this upside will likely be limited should lockdown restrictions be extended again.

AUD (0.765) ▲

▪ AUD depreciated as risk rally took a breather, amid expectations of a watered down US stimulus package, bleak December economic data, vaccine shortfall and the implementation of a partial lockdown in Beijing.

▪ AUD could reverse the downtrend, on the back of a resumption of the bearish dollar trend driven by the Fed’s reaffirmation of its ultra-easy policy stance. Commencement of vaccine rollout domestically at the end of February would also lend support to the AUD.

NZD (0.716) ▲

▪ NZD depreciated in January, mainly attributable to stronger USD, weak PMI data, and a new outbreak in China. However, the downside was partially capped by a better-than-expected increase of headline CPI and strong retail sales data.

▪ Concerns over the delay in the vaccination program, which slated to be in April for front liners and the public from July, may undermine the country's recovery as its international borders remain closed. Nonetheless, the resumption of broad USD weakness on the prospect of further fiscal stimulus and dovish US Fed may lift the kiwi.

Optimism and progress of COVID-19 vaccination to weigh on the greenback

▪ As of 30 Jan, more than 94.9m vaccine doses have been administered globally though most countries yet to receive a single dose. According to data compiled by the Our World in Data project at the University of Oxford, Israel has the highest vaccinated population (34.7%) that already received at least one dose of vaccine, followed by UAE (31.2%), the UK (13.2%), Bahrain (10.0%) and the US (7.6%). The EU countries lagged behind the US and UK due to delayed vaccination campaigns, pending regulatory approval for the Pfizer-BioNTech and Moderna vaccines.

▪ Currently, eight vaccines are being used globally, led by Pfizer-BioNTech (49 countries), followed by Moderna (13 countries), Oxford-AstraZeneca (5 countries), and Sinopharm-Wuhan and Sinovac (4 countries respectively). Meanwhile, Johnson & Johnson vaccine is expected to be approved in the US soon, making it a third vaccine in the US with a capacity of 1.0b doses production by year-end.

▪ The dollar is expected to resume its downtrend as a risk-on sentiment return due to more countries are expected to kick off their vaccination campaign. The dollar would also be pressured by the dovish US Fed, as reaffirmed by its ultra-loose policy stance during the last FOMC meeting and the prospect of further US fiscal stimulus.

Source: Kenanga Research - 2 Feb 2021