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Dollar’s Upside Correction to Continue

Dollar’s Upside Correction to Continue

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A phase in the markets that began in mid-May ended last week with a dramatic sell-off in stocks and risk-assets in general.  The Federal Reserve confirmed what investors already knew.  After all, the implied interest rates for the December 2021 fed funds futures implied a negative yield at the start of the month, and a rate hike was not reflected in the derivatives markets until 2023.  

It may not have been what the Fed said or did, but simply the old "buy the rumor sell the fact" trigger of what we have suggested the charts implied:  the bull run in the risk assets was getting stretched.  Nor can the increase in the Covid cases as stay-at-home orders are rescinded really be much of surprise.  After all, the virus has not been cured, and shutting down the economy was a way to avoid overburdening the public health infrastructure.  Moreover, some assets markets had rallied, like the equities and currencies in Latam, as cases and fatalities increased. 

Although markets stabilized ahead of the weekend after the drama on June 11, we suspect that corrective forces will carry over into next week.  Below we suggest some corrective targets while being sensitive to levels that would indicate the trend moves have resumed.   

Dollar Index: The MACD and Slow Stochastic indicators have begun to turn higher. The 97.35 area was overcome ahead of the weekend—the next target immediate target 98.00.  The 200-day moving average and the (61.8%) retracement of the leg down since the May 25 high (~100.00) are found near 98.40. A convincing move above there would be significant.  A break of the 96.20-96.30 area would likely signal the end of the corrective bounce.  

Euro: The single currency peaked in the middle of the week a little above $1.1420 and pulled back to nearly $1.1210 before the weekend.  The euro tried to rally after the June 11 drop and made it up to  $1.1340, stopping shy of the area (~$1.1350-$1.1375) that would have signaled the resumption of the rally. The Slow Stochastic did not confirm the high, and the MACD is turning lower. The next important target is near $1.1150, and then, possibly, a test on the 200-day moving average (~$1.1025). Three-month implied volatility has begun trending higher, and the risk-reversals (skew between calls and puts) have also started increasing.  This suggests that euro calls are being bought and may reflect rolling spot positions into calls by levered accounts.   

Japanese Yen:  After reaching almost JPY110.00 after the US employment data on June 5, the dollar backed off in the first four sessions last week before stabilizing ahead of the weekend. The greenback found bids near JPY106.60. A break would signal a test on JPY106, which is more significant support. It recovered to around JPY107.60 ahead of the weekend. The Slow Stochastic is still headed lower while the MACD is still overextended after pulling back but looks to have flattened out. The JPY107.85 area is the first retracement objective (38.2%), and a move through there would signal an extended correction. The dollar would likely enter the JPY108.15-JPY108.55, which houses the other retracement objectives and the 200-day moving average.  

British Pound:  Sterling peaked in the middle of last week a little above $1.28.  The trendline drawn from last December's election high and the March high came in near $1.2855.  It sold off on June 11 and was unable to sustain upticks ahead of the weekend, falling to $1.2475 area.  The other important trendline is drawn off the March and May lows and begins next week around $1.24, which is also near the (61.8%) retracement objective of sterling's rally since May 25.  A break could signal a move toward $1.2180. The MACD and Slow Stochastic have turned down. It takes a move back above $1.2650 to stabilize the technical tone.

Canadian Dollar: The price action of the US dollar in the middle of last week seemed to be a bullish hammer candlestick forewarning of the bounce that lifted the greenback to CAD1.3665 before the weekend.  It had made a three-month low near CAD1.3315 on June 10.  The MACD and Slow Stochastic have turned higher.  The CAD1.3680 area corresponds to the (50%) retracement of the decline since the May 22 high (~CAD1.4050) and the 20-day moving average.  A move above there targets the CAD1.3800-CAD1.3830 area.   On the other hand, a break of the CAD1.3450-CAD1.3470 warns the US dollar's down move has resumed.  

Australian Dollar:  The drop in recent days from around $0.7060, the high for the year set on June 10 to $0.6800 ahead of the weekend, is likely to be only the first leg down in the Aussie's long overdue correction. A move lower would violate an uptrend line drawn off the March panic lows.   The MACD and Slow Stochastic have turned lower.  If it is correcting the rally that began on May 15, then it met the initial (38.2%) retracement target. The next retracement target (50%) is around $0.6735, but we suspect the next retracement objective (61.8%) near $0.6655, a little below the 200-day moving average ($0.6665) may offer stronger support.  A move above the $0.6950 undermines this bearish technical view.  

Mexican Peso:  The dollar put in the lows for the week prior to the FOMC meeting and on June 11.  However, its recovery ahead of the weekend was sharp as it retraced half of the week's loss in one fell swoop. That retracement objective was near MXN22.2050, held on a closing basis. A break of the MXN22.00 area would suggest the dollar's downtrend has resumed. Nevertheless, the technical indicators suggest the upside correction of the dollar has just begun. The first leg of the correction was to almost MXN22.95, and the second one could target the MXN23.60 and possibly the MXN24.00 area.  

Chinese Yuan: Chinese officials say that they want a stable currency, and many doubt them.  Nevertheless, they have achieved it.  The yuan fell almost 1.7% in Q1, which covers both the trade agreement with the US and the pandemic.  So far this quarter, it is flat.   However, this month it has gained about 0.75%, and the PBOC's fixings seemed to be aimed at moderating the dollar's decline.  The dollar did fall to around CNY7.0550 last week, its lowest level since the end of April. As we have suggested, the technical indicators favor corrective dollar gains in the days ahead, and this could see it could rise toward CNY7.12.   

Gold: The precious metal bounced off the $1670 area seen after the US employment data and reached almost $1745 when risk assets got hammered. It consolidated ahead of the weekend.  Broadly speaking, gold remains in a two-month range of $1650 to $1750. The MACD and Slow Stochastic have room for another probe of the highs.  In mid-May, when it pushed through the top, it got as far as $1765.40 before reversing lower.  Above there, the bigger target is $1800.  From the middle of March through the middle of May, the 30-day correlation between gold and the S&P 500 (percentage change) was positive, and it has switched to its more common relationship.  

Oil: Two candlesticks bookend last week's oil trade. The July contract began the week with a brief look above $40 a barrel and then beaten back, leaving a shooting star. Ahead of the weekend, the contract slipped below $34.50 before recovering smartly, leaving a bullish hammer candlestick.  Nevertheless, the momentum indicators have turned lower and are still in overextended territory.  This suggests that upticks are not to be trusted.  The $37.50 area may offer a nearby cap.  A break of that $34.50 area could signal a pullback toward $32.

US Rates:  After rising every day in the first week of June, the US 10-year yield fell for the first four sessions last week before stabilizing on Friday.  The yield fell almost 20 bp last week.  It had been flirting with 90 bp after the employment data, having reached 65 bp in the equity carnage on June 11.  The momentum indicators on the futures contract are positioned for additional gains.  However, the economic data that will likely be reported will likely fan hopes of an accelerating recovery. Most of the decline in the 10-year yield was not matched by the short-end, and the 2-10 year yield curve flattened by almost 18 bp last week.  

S&P 500:  The gap lower on June 11 is a critical technical development, leaving a four-day island top in its wake.  The gap (~3123.5-3181.50) may not be filled any time soon.  If the S&P 500 is retracing the last leg up from the middle of May, then it met the 50% target near 3000 (200-day moving average is 3015), overshooting it a little on an intraday basis ahead of the weekend.  The next retracement target (61.8%) is near 2945.  If instead, it is correcting the move off March's low, the initial retracement objective (38.2%) is near 2835.   The MACD and Slow Stochastic have just turned lower, suggest the deeper correction may be more likely.  






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Gonorrhea became more drug resistant while attention was on COVID-19 – a molecular biologist explains the sexually transmitted superbug

The US currently has only one antibiotic available to treat gonorrhea – and it’s becoming less effective.

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The _Neisseria gonorrhoeae_ bacterium causes gonorrhea by infecting mucous membranes. Design Cells/iStock Getty Images Plus via Getty Images

COVID-19 has rightfully dominated infectious disease news since 2020. However, that doesn’t mean other infectious diseases took a break. In fact, U.S. rates of infection by gonorrhea have risen during the pandemic.

Unlike COVID-19, which is a new virus, gonorrhea is an ancient disease. The first known reports of gonorrhea date from China in 2600 BC, and the disease has plagued humans ever since. Gonorrhea has long been one of the most commonly reported bacterial infections in the U.S.. It is caused by the bacterium Neisseria gonorrhoeae, which can infect mucous membranes in the genitals, rectum, throat and eyes.

Gonorrhea is typically transmitted by sexual contact. It is sometimes referred to as “the clap.”

Prior to the pandemic, there were around 1.6 million new gonorrhea infections each year. Over 50% of those cases involved strains of gonorrhea that had become unresponsive to treatment with at least one antibiotic.

In 2020, gonorrhea infections initially went down 30%, most likely due to pandemic lockdowns and social distancing. However, by the end of 2020 – the last year for which data from the Centers for Disease Control and Prevention is available – reported infections were up 10% from 2019.

It is unclear why infections went up even though some social distancing measures were still in place. But the CDC notes that reduced access to health care may have led to longer infections and more opportunity to spread the disease, and sexual activity may have increased when initial shelter-in-place orders were lifted.

As a molecular biologist, I have been studying bacteria and working to develop new antibiotics to treat drug-resistant infections for 20 years. Over that time, I’ve seen the problem of antibiotic resistance take on new urgency.

Gonorrhea, in particular, is a major public health concern, but there are concrete steps that people can take to prevent it from getting worse, and new antibiotics and vaccines may improve care in the future.

How to recognize gonorrhea

Around half of gonorrhea infections are asymptomatic and can only be detected through screening. Infected people without symptoms can unknowingly spread gonorrhea to others.

Typical early signs of symptomatic gonorrhea include a painful or burning sensation when peeing, vaginal or penal discharge, or anal itching, bleeding or discharge. Left untreated, gonorrhea can cause blindness and infertility. Antibiotic treatment can cure most cases of gonorrhea as long as the infection is susceptible to at least one antibiotic.

There is currently only one recommended treatment for gonorrhea in the U.S. – an antibiotic called ceftriaxone – because the bacteria have become resistant to other antibiotics that were formerly effective against it. Seven different families of antibiotics have been used to treat gonorrhea in the past, but many strains are now resistant to one or more of these drugs.

The CDC tracks the emergence and spread of drug-resistant gonorrhea strains.

Why gonorrhea is on the rise

A few factors have contributed to the increase in infections during the COVID-19 pandemic.

Early in the pandemic, most U.S. labs capable of testing for gonorrhea switched to testing for COVID-19. These labs have also been contending with the same shortages of staff and supplies that affect medical facilities across the country.

Many people have avoided clinics and hospitals during the pandemic, which has decreased opportunities to identify and treat gonorrhea infections before they spread. In fact, because of decreased screening over the past two and a half years, health care experts don’t know exactly how much antibiotic-resistant gonorrhea has spread.

Also, early in the pandemic, many doctors prescribed antibiotics to COVID-19 patients even though antibiotics do not work on viruses like SARS-CoV-2, the virus that causes COVID-19. Improper use of antibiotics can contribute to greater drug resistance, so it is reasonable to suspect that this has happened with gonorrhea.

Overuse of antibiotics

Even prior to the pandemic, resistance to antibiotic treatment for bacterial infections was a growing problem. In the U.S., antibiotic-resistant gonorrhea infections increased by over 70% from 2017-2019.

Neisseria gonorrhoeae is a specialist at picking up new genes from other pathogens and from “commensal,” or helpful, bacteria. These helpful bacteria can also become antibiotic-resistant, providing more opportunities for the gonorrhea bacterium to acquire resistant genes.

Strains resistant to ceftriaxone have been observed in other countries, including Japan, Thailand, Australia and the U.K., raising the possibility that some gonorrhea infections may soon be completely untreatable.

Steps toward prevention

Currently, changes in behavior are among the best ways to limit overall gonorrhea infections – particularly safer sexual behavior and condom use.

However, additional efforts are needed to delay or prevent an era of untreatable gonorrhea.

Scientists can create new antibiotics that are effective against resistant strains; however, decreased investment in this research and development over the past 30 years has slowed the introduction of new antibiotics to a trickle. No new drugs to treat gonorrhea have been introduced since 2019, although two are in the final stage of clinical trials.

Vaccination against gonorrhea isn’t possible presently, but it could be in the future. Vaccines effective against the meningitis bacterium, a close relative of gonorrhea, can sometimes also provide protection against gonorrhea. This suggests that a gonorrhea vaccine should be achievable.

The World Health Organization has begun an initiative to reduce gonorrhea worldwide by 90% before 2030. This initiative aims to promote safe sexual practices, increase access to high-quality health care for sexually transmitted diseases and expand testing so that asymptomatic infections can be treated before they spread. The initiative is also advocating for increased research into vaccines and new antibiotics to treat gonorrhea.

Setbacks in fighting drug-resistant gonorrhea during the COVID-19 pandemic make these actions even more urgent.

Kenneth Keiler receives funding from NIH.

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Measuring the Ampleness of Reserves

Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary…

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Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary rise poses a natural question: Are the rates paid in the market for reserves still sensitive to changes in the quantity of reserves when aggregate reserve holdings are so large? In today’s post, we answer this question by estimating the slope of the reserve demand curve from 2010 to 2022, when reserves ranged from $1 trillion to $4 trillion.

What Are Reserves? And Why Do They Matter?

Banks hold accounts at the Federal Reserve where they keep cash balances called “reserves.” Reserves meet banks’ various needs, including making payments to other financial institutions and meeting regulatory requirements. Over the past fifteen years, reserves have grown enormously, from tens of billions of dollars in 2007 to $3 trillion today. The chart below shows the evolution of reserves in the U.S. banking system as a share of banks’ total assets from January 2010 through September 2022. The supply of reserves depends importantly on the actions of the Federal Reserve, which can increase or decrease the quantity of reserves by changing its securities holdings, as it did in response to the global financial crisis and the COVID-19 crisis.

Reserves Have Ranged from 8 to 19 Percent of Bank Assets from 2010 to 2022

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG”); authors’ calculations.

Why does the quantity of reserves matter? Because the “price” at which banks trade their reserve balances, which in turn depends importantly on the total amount of reserves in the system, is the federal funds rate, which is the interest rate targeted by the Federal Open Market Committee (FOMC) in the implementation of monetary policy. In 2022, the FOMC stated that “over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.” In this ample reserves regime, the Federal Reserve controls short-term interest rates mainly through the setting of administered rates, rather than by adjusting the supply of reserves each day as it did prior to 2008 (as discussed in this post). In today’s post, we describe a method to measure the sensitivity of interest rates to changes in the quantity of reserves that can serve as a useful indicator of whether the level of reserves is ample.

The Demand for Reserves Informs Us about Rate Sensitivity to Reserve Shocks

To assess whether the level of reserves is ample, one needs to first understand the demand for reserves. Banks borrow and lend in the market for reserves, typically overnight. The reserve demand curve describes the price at which these institutions are willing to trade their balances as a function of aggregate reserves. Its slope measures the price sensitivity to changes in the level of reserves. Importantly, banks earn interest on their reserve balances (IORB), set by the Federal Reserve. Because the IORB rate directly affects the willingness of banks to lend reserves, it is useful to describe the reserve demand curve in terms of the spread between the federal funds rate and the IORB rate. In addition, we control for the overall growth of the U.S. banking sector by specifying reserve demand in terms of the level of reserves relative to commercial banks’ assets.

There is a clear nonlinear downward-sloping relationship between prices and quantities of reserves, consistent with economic theory. The chart below plots the spread between the federal funds rate and the IORB against total reserves as a share of commercial banks’ total assets.  When reserves are very low, the demand curve has a steep negative slope, reflecting the willingness of borrowers to pay high rates because reserves are scarce. At the other extreme, when reserves are very high, the curve becomes flat because banks are awash with reserves and the supply is abundant. Between these two regions, an intermediate regime–that we refer to as “ample”–emerges, where the demand curve exhibits a modest downward slope. The color coding of the chart reflects the shifts in the reserve demand curve over time. In particular, the curve appears to have moved to the right and upward around 2015 and then moved upward after March 2020, at the onset of the COVID pandemic.

Reserve Demand Has Shifted over Time

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG,” “IOER,” and “IORB”); authors’ calculations.

This chart highlights two of the main challenges in estimating the slope of the reserve demand curve. First, the curve is highly nonlinear, which means that a standard linear estimation approach is not appropriate. Second, various long-lasting changes in the regulation and supervision of banks, in their internal risk-management frameworks, and in the structure of the reserve market itself have resulted in shifts in the reserve demand curve. A third challenge is that the quantity of reserves may be endogenous to banks’ demand for them. Therefore, to properly measure the reserve demand curve, one must disentangle shocks to supply from those to demand. As we explain in detail in a recent paper, our estimation strategy addresses all three of these challenges.

Estimating the Slope of the Reserve Demand Curve

Our approach provides time-varying estimates of the price sensitivity of the demand for reserves that can be used to distinguish between periods in which reserves are relatively scarce, ample, or abundant. The chart below presents our daily estimates of the slope of the demand curve, as measured by the rate sensitivity to changes in reserves. Although we do not have a precise criterion for when reserves are scarce versus ample, during two episodes in our sample, the estimated rate sensitivity is well away from zero. The first episode occurs early in our sample, in 2010, and the second emerges almost ten years later, in mid-2019. In two other periods—during 2013-2017 and from mid-2020 through early September 2022—the estimated slope is very close to zero, indicating an abundance of reserves. The remaining periods are characterized by a modest negative slope of the reserve demand curve, consistent with ample (but short of abundant) reserves. The overall pattern of these estimates is robust to changes in the model specification, such as including spillovers from the repo and Treasury markets or measuring reserves as a share of gross domestic product or bank deposits (instead of as a share of banks’ assets).

Rate Sensitivity Changed over Time, Following the Path of Reserves

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG,” “IOER,” and “IORB”); authors’ calculations.

Interest Rate Spreads Alone Are Not Reliable Indicators of Reserve Scarcity

As we discuss in our paper, the time variation in the estimated price sensitivity in the demand for reserves is based on observations of small movements along the demand curve due to exogenous supply shocks. The location of the curve itself, however, also changes over time. That is, there is not a constant relationship between the level of reserves and the slope of the reserve demand curve.  

In our paper, we find evidence of both horizontal and vertical shifts in the reserve demand curve, with vertical upward shifts being particularly important since 2015. This finding implies that the level of the federal funds-IORB spread may not be a reliable summary statistic for the sensitivity of interest rates to reserve shocks, and that estimates of the price sensitivity in the demand for reserves provide additional useful information.

In summary, we have developed a method to estimate the time-varying interest rate sensitivity of the demand for reserves that accounts for the nonlinear nature of reserve demand and allows for structural shifts over time. A key advantage of our methodology is that it provides a flexible and readily implementable approach that can be used to monitor the market for reserves in real time, allowing one to assess the “ampleness” of the reserve supply as market conditions evolve.

Gara Afonso is the head of Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Gabriele La Spada is a financial research economist in Money and Payments Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.   

John C. Williams is the president and chief executive officer of the Federal Reserve Bank of New York.  

How to cite this post:
Gara Afonso, Gabriele La Spada, and John C. Williams, “Measuring the Ampleness of Reserves,” Federal Reserve Bank of New York Liberty Street Economics, October 5, 2022, https://libertystreeteconomics.newyorkfed.org/2022/10/measuring-the-ampleness-of-reserves/.


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The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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Vir awarded $1 billion multi-year BARDA influenza contract

The US Government’s Biomedical Advanced Research and Development Authority (BARDA) has made an initial investment of approximately $55
The post Vir awarded…

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The US Government’s Biomedical Advanced Research and Development Authority (BARDA) has made an initial investment of approximately $55 million for rapid development of VIR-2482, the Vir Biotechnology’s investigational prophylactic monoclonal antibody (mAb) for seasonal and pandemic influenza viruses.

Its purpose being to support pandemic preparedness for influenza and other infectious disease threats, this is the first award from BARDA – part of the US Department of Health and Human Services’ (HHS) Administration for Strategic Preparedness and Response (ASPR) – for pre-exposure prophylaxis for influenza.

VIR-2482 is an investigational intramuscularly administered influenza A-neutralising mAb. It has been shown in vitro to cover all major influenza A strains that have arisen since the 1918 ‘Spanish flu’ pandemic and is designed as a universal prophylactic for influenza A.

Furthermore, VIR-2482 could have the potential to overcome the limitations of current flu vaccines and result in higher levels of protection, given it does not rely on an individual to create their own protective antibody response. Additionally, the incorporated Xencor Xtend Technology is half-life engineered, meaning a single dose could potentially last an entire flu season.

Seasonal influenza (or flu) is a highly contagious respiratory disease that can cause severe illness and life-threatening complications. In just the past few years, seasonal influenza has resulted in around 4 million hospitalisations and circa 500,000 global annual deaths.

Pandemic influenza, by contrast, is a contagious airborne respiratory disease with unpredictable timing and severity and against which humans have little or no immunity. Four such pandemic influenzas have occurred in only the past century, with the 1918 ‘Spanish flu’ alone having resulted in 50 million deaths worldwide.

Given the past two years’ and ongoing experience with SARS-CoV-2 and its variants, the BARDA multi-year contract – potentially an investment of up to $1 billion in total – aims to continue the Authority’s efforts in preparing for and responding to public health emergencies. Currently, there is a significant unmet need to address shortcomings in preventative and therapeutic options for influenza, the efficacy of the present options that do exist ranging from only 10% to 60%.

Therefore, this initial $55 million investment aims to address these shortcomings. It includes for a phase 2 pre-exposure prophylaxis trial, to begin this second half of the year, with initial data expected by mid-2023. The balance of the award is subject to up to 12 options being exercised by BARDA in further support of the development of pre-exposure prophylactic antibodies, including and beyond VIR-2482.

This extended area, beyond prevention of influenza illness, will potentially be for supportive medical countermeasures for up to 10 “other pathogens of pandemic potential”, whether they be “chemical, biological, radiological [or] nuclear”.

Dr Rajesh Gupta, vice president, global health portfolio and public-private partnerships at Vir Biotechnology, said: “COVID-19 reinforced the ever-present global threat of infectious diseases, and the critical need for readily available solutions in advance of the next pandemic.”

A commercial-stage immunology company, Vir Biotechnology’s current development pipeline includes product candidates targeting hepatitis B and hepatitis D viruses and human immunodeficiency virus, in addition to influenza A and COVID-19, the latter of which Vir (together with GSK) previously delivered the antibody sotrovimab (Xevudy) for. The company also co-discovered ansuvimab-zykl for addressing the Ebola crisis.

Bolyn Hubby, PhD, executive vice president and chief corporate affairs officer at Vir Biotechnology, said: “Just as the COVID-19 pandemic required unprecedented cross-sector collaboration around the globe, tackling the outbreaks and pandemics of tomorrow will require an ‘all hands on deck’ approach that unites a broad array of public and private organisations.”

Under a collaboration agreement signed with GlaxoSmithKline (GSK) in 2021, GSK holds an exclusive option to lead post-phase 2 development and commercialisation of VIR-2482.

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