The rapidly appreciating euro will be one of the focal points for Christine Lagarde at the ECB meeting on Thursday. In the US, Treasury yields are also on the rise. Iron ore is also surging © FT montage; Bloomberg

Can the ECB keep the surging euro in check?

Investors expect European policymakers to push back against the euro’s rapid appreciation at their final rate-setting meeting of the year on Thursday, but some are questioning whether the central bank can do much to stop the exchange rate from moving higher.

Since the start of the year, the euro has climbed more than 8 per cent against the US dollar, and at the start of December it gained a foothold above $1.20, hitting $1.21 on Friday. Large banks now expect the currency to reach $1.25 in the coming months.

Christine Lagarde, the ECB president, has already highlighted the exchange rate’s negative impact on inflation, saying in September that she expected the eurozone to remain in deflation for a considerable time. But this messaging — reinforced by the central bank’s chief economist Philip Lane in the same month — has had little impact on the euro’s upward march.

Analysts mainly attributed the European currency’s rise to the wilting dollar, the result of growing optimism about global growth prospects following positive vaccine developments. They expect the dollar to move substantially lower in 2021.

“There is not much that the ECB can actually do to directly affect the [exchange rate],” said Athanasios Vamvakidis, a currency strategist at Bank of America. “It is not about the euro, but about the dollar.” Eva Szalay

How far can US government bond yields rise?

A recent decline in US government debt prices has rekindled a debate among investors about just how high long-dated Treasury yields can climb.

Yields, which rise when prices fall, have climbed steadily in recent months as investors have sought to look past the surge in coronavirus cases globally and instead focus on the forthcoming rebound in growth as the world emerges from yet another round of lockdowns.

The pace picked up once again last week, pushing 10-year Treasury yields towards 1 per cent, reaching levels not seen since early November when the first of several vaccine breakthroughs was announced. A proposal put forward by Congressional leaders last week calling for $908bn in government spending jolted investors into believing in a potential break in the deadlock on economic support, giving further fuel to the trade.

While Goldman Sachs believes this will be whittled down to $700bn once Republican demands are met, the growing prospects of additional stimulus have also helped buoy inflation expectations. Investors will be paying close attention to the consumer price index report for November, out on Thursday, for the latest read on inflation.

The prospect of stronger growth, and higher inflation, is expected to further take the shine off Treasuries, investors say.

According to Subadra Rajappa, head of US rates strategy at Société Générale, 10-year Treasury yields are set to “gradually” rise to 1.5 per cent by the end of 2021.

“With the availability of several vaccines and therapeutics we expect the US and global economies to continue to recover, as monetary policy remains extraordinarily accommodative,” wrote Ms Rajappa in a recent note. “In the context of rising supply, we only see two possible paths for yields: sideways or higher.” Colby Smith

Can iron ore’s meteoric rise continue?

The price of iron ore has rocketed by 56 per cent this year. Last week, the steelmaking ingredient hit $145.30 a tonne — its highest level in almost eight years — after one of the world’s biggest producers lowered production guidance. 

At its annual investor day, Brazilian miner Vale forecast production of 315m to 335m tonnes next year, below the market consensus estimate of 353m tonnes.

With less iron ore in the market, analysts believe the price could continue to rise if the La Niña weather system and heavy rains cause disruption in Brazil and Australia.

“We now believe a price spike to above $150 a tonne in the near term is likely,” said Christopher LaFemina, analyst at Jefferies, adding that “Vale has a history of missing what had previously been deemed conservative guidance”.

This year’s iron ore bull market has been driven by a mix of strong demand from China, which has been spending heavily to kickstart its economic recovery from Covid-19, and reduced output from Brazil and Australia.

While supply disruptions could provide a further boost to prices, traders think demand in China might start to cool. 

Profit margins at Chinese steel mills are coming under pressure — and not just from rising iron prices. The price of coking coal, the other ingredient needed to make steel, has rocketed since Beijing banned imports from Australia because of a diplomatic row with Canberra. Neil Hume

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