Germany starts new lockdown

Even as more and more countries go on partial or complete lockdown again, the euro seems unresponsive to the bad news and remains above 1.2100 against the dollar. In Germany, Angela Merkel has confirmed it: from this day until January 10, the country will go on lockdown. And this time, it is no ‘light’ or regionally adapted confinement as in November, but overall measures applicable to the whole country. As such, schools, nurseries and non-essential stores are now closed. The German authorities’ decision to quarantine for a second time raises fears of a new recession in their country. The first lockdown caused the worst one in recent German history, with GDP falling 1.7% in the first quarter and 9.8% in the second. The 8.5% rebound in the third quarter only partially offset the decline. In the Netherlands, shops and public spaces will be closed at least until January 19. The Czech Republic is also reintroducing measures. It is closing hotels and restaurants and extending the Christmas school holidays. Even the prospect of a hard Brexit is not affecting the European currency, but for the moment the market remains convinced that at least a basic agreement is a given. Two positive news did support the euro: Last week, the ECB further increased its asset buyback programme and assured of its unwavering support until the end of the economic crisis. It announced Thursday that it was increasing its pandemic purchase programme (PEPP) by 500 billion euros to 1.85 trillion. It also increased its duration until March 2022. The euro also benefited from Hungary’s and Poland’s dropping their veto on the European recovery plan. The plan is now awaiting the green light from all the national parliaments of the Union.

While this Sunday was to be the end of the Brexit saga, Ursula von der Leyen and Boris Johnson asked their negotiators to continue the negotiations in the hope of finally reaching an agreement. The market remains convinced that the European Union and the United Kingdom will reach one even if Prime Minister Boris Johnson said yesterday that a ‘no-deal’ Brexit was in his view the most likely scenario. Michel Barnier, on the other hand, believes that an agreement is still feasible before the end of the year. The British currency has been tossed around with the advances and setbacks in the talks but seems to give more credit to Mr Barnier than to the British Prime Minister. After hitting a low of 1.3135 against the dollar on Friday, the pound rebounded to 1.3444 on Monday before falling back to 1.3300 and then approaching 1.3500 this morning. Its movements are similar against the Swiss franc. The pound traded at less than 1.1700 on Friday before recovering above 1.1900, falling to 1.1800 and hitting 1.1940 this morning.

The SECO said the Swiss economy should contract by 3.3% this year following the pandemic. GDP is expected to grow by 3% in 2021, while it had previously forecast growth of 3.8%. The second wave of the coronavirus epidemic has caused forecasts to be revised downwards. The franc remains in demand below 1.0800 against the euro and at the highest of the year against the dollar at 0.8850. The greenback had opened on January 2 at 0.9670 francs to the dollar.

The days leading up to the holiday season will be busy with monetary policy meetings. We will have the Fed today, the Bank of England, the Bank of Norway and the Swiss National Bank tomorrow and finally the Bank of Japan and the Central Bank of Russia on Friday. The US central bank is facing a slowdown in the job market and a high number of coronavirus cases in the country. But the Fed should not take new decisions tonight and confirm its ultra-accommodative policy. The Bank of England will be expected to act on Brexit as the December 31 deadline approaches, as will the SNB on the level of the franc and its interventions on the foreign exchange market. Banks in Japan and Norway are expected to hold their rates steady. Lastly, in Russia, Elvira Nabiulian said there was little room for a downward adjustment after cutting rates by 350 points in 2020. Inflation surprised the markets by going above the CBR’s 4.2% target, to 4.4% on an annual basis. Coupled with statements by the Governor of the Bank of Russia, this has caused analysts to push back predictions for a quarter-point rate cut from December to February next year.