Credit Agricole

Asia overnight: The PBOC's RRR cut on Friday continued to underwrite investor sentiment in Asia today. Despite China introducing measures to curtail overseas listing by Chinese technology firms, nearly all Asian bourses (including HKand Chinese ones) were trading higher at the time of writing.S&P500 futures were in the red at the time of writing, however. The USD was the strongest performer in the G10 in the Asian session, with higher UST yields from Friday continuing to support the currency. The NOK and AUD were the weakest performers, with the latter being weighed down by growing Covid infections numbers in Australia.

AUD: plagued by the virus While Australia’s domestic economy continues to recover strongly, as will likely be shown by labour market data later this week, the pandemic remains an issue and will dent the economic data in the coming months; starting with consumer sentiment data this Wednesday. Indeed, cases of the delta variant of Covid are continuing to rise in NSW, Australia’s largest state, meaning that a lockdown is unlikely to end as scheduled on Friday. Previously a model for how to handle Covid with isolated lockdowns, the more infectious delta variant of Covid has challenged the NSW model and led to a widespread lockdown. Importantly, the current lockdown is occurring in the absence of government support. NSW is scheduled to receive more targeted financial aid from the Federal government in the coming days. The current lockdowns demonstrate that while Australia’s vaccination rate remains low (currently only 36% of the population has had at least one jab), the economy and currency will remain vulnerable to random lockdowns. The good news is that Australia will soon start receiving 1M doses of the Pfizer vaccine a week, which the government claims will allow everyone over the age of 16 to have jabs by at least November. The recent lockdown in NSW combined with the one that ended less than a month ago in Victoria has Australians realizing that the only way to avoid future lockdowns is vaccination. So, vaccine hesitancy rates are also falling. For now, however, the AUD will be held back by the NSW lockdown and investor concern that it could be extended.

EUR: The ECB’s new policy strategy is a long-term EUR negative. On the face of it, the outcome of the ECB strategy review last week had very muted directional impact on the EUR. In our view, this is due to two important developments. The first relates to the results of the strategy review that saw the Governing Council adopting a symmetric 2%inflation target that the ECB will aspire to achieve over the medium-term while tolerating inflation overshoots in the interim. While this was a dovish change from the previous inflation target, the ECB emphasized that any deviations from target will likely be ‘moderate and temporary’.