US Dollar Sensitive To Coronavirus Stimulus Bill Progress

Following US President Joe Biden’s inauguration last week, the US dollar (USD) received a boost as he announced plans for a USD 1.9 trillion stimulus package to help support the US economy amid COVID-19.

Although the announcement provided some optimism for the US dollar (USD), which in turn provided support for the British pound (GBP), the bill is yet to be passed in congress. The uncertainty of the bill’s progress will undoubtedly leave developments in the US dollar (USD) hanging in the balance over the coming weeks.

With current financial benefits in the US due to end in March, Biden’s early announcement of the new stimulus package was very much welcomed by the American people. His timely statement also means that there should be enough time for the bill to be discussed prior to the closure of any existing government financial support.

The US dollar to euro (USD/EUR) exchange rate has remained around the EUR 0.82 mark during the last four trading sessions, while the US dollar to Japanese yen (USD/JPY) exchange rate has also held steady at JPY 103.75.

It’s expected that US President Biden’s coronavirus stimulus package will be subject to criticism in congress this week, which is likely to dictate the direction of the US dollar (USD). Derek Halpenny, head of research at MUFG believes that the monetary size of the package is likely to be whittled down. “A revised package of approx. USD 1.0-1.2trn is around what’s expected. Anything outside of that could see yields respond. We’d expect a less immediate reaction in FX markets but hold to our view that steps that lift inflation expectations will keep the US dollar on a weaker footing.”

Australian Dollar Cautious Following Covid-19 Concerns

The Australian dollar (AUD) took a hit during the beginning of 2021 following new outbreaks of COVID-19 cases. Whilst it’s now been reported that last week saw no new cases recorded, concerns have turned to the slow rollout in vaccination programmes, which is set to begin in February.

Jim Reid, Research Strategist at Deutsche Bank stated that “vaccinations are slower than what we’d expected in virtually all large countries and even in countries where it’s been quicker, e.g. the U.K., the one dose first strategy means that full protection will be slower to materialise. It also doesn’t seem to be the case that just vaccinating the vulnerable will be enough to lift most restrictions as I’d expected.”

At the time of writing, the British pound to Australian dollar (GBP/AUD) exchange rate has slipped to AUD 1.78, which is mostly weighed down by disappointing UK flash PMI figures on Friday, indicating a lull in economic activity during January.

Against the US dollar (USD), the Australian dollar (AUD) is trading lower at AUD 0.77, and the Australian dollar to New Zealand dollar (AUD/NZD) exchange rate has also slipped to NZD 1.07. The New Zealand dollar (NZD) seems to be continuing its upward trend, outperforming its key currency competitors following an improved economic outlook.

Improved Market Sentiment In New Zealand Dollar

Following the declaration that New Zealand is now coronavirus-free, the New Zealand dollar (NZD) is particularly benefitting from the Reserve Bank of New Zealand’s (RBNZ) decision to not cut interest rates any further.

It was initially predicted that the RBNZ would cut rates to help support New Zealand’s economy, but the decision appears to be reversed following the rapid growth in New Zealand property prices.

Jarrod Kerr, Chief Economist at Kiwibank stated “the rampant advances in the housing market have surely taken a negative cash rate off the table. We have changed our call on the RBNZ. We now expect the OCR to be left unchanged, well into 2022”.

At the time of writing, the British pound to New Zealand dollar (GBP/NZD) has experienced mild gains at NZD 1.91, and the New Zealand dollar to US dollar (NZD/USD) exchange rate stands at USD 0.72.

This week will see the release of New Zealand services data. A less than promising performance could cast a shadow over the New Zealand dollar (NZD).

South African Rand Extends Losses

Following news of a South African variant of COVID-19, the South African rand (ZAR) is trading sharply lower against key currency competitors as the coronavirus situation continues to dampen risk sentiment. UK Health Secretary, Matt Hancock, stated the possibility that the COVID-19 variant could cut vaccine efficacy by up to 50%. At present, there are 77 recorded cases of the South African coronavirus variant in the UK.

The British pound (GBP) is edging higher against the South African rand (ZAR), with the UK currency currently trading at ZAR 20.87. Similarly, the US dollar to South African rand (USD/ZAR) exchange rate is also higher at ZAR 15.18.

The South African rand (ZAR) struggled to hold on to gains last week after the South African Reserve Bank (SARB) hinted that they would potentially cut interest rates at a later date. For now, rates are unchanged and will remain at 3.5% for the time being.