Daily Market Pulse

Back-and-forth over US infrastructure bill


Yesterday, the greenback remained firm, with the DXY index almost unchanged against a basket of major currencies. The dollar demand is partly driven by the hot US bond market, where we can see the Treasury yields offering yield premiums well above their global peers (i.e. US bonds versus German bonds). Looking ahead, this yield’s advantage should continue to be appealing for foreign investors, providing support for the USD when it falls. The back-and-forth over the US infrastructure bill will continue to be market-moving today, after lawmakers ended Thursday, once more, without voting on a $550 billion infrastructure bill. As such, there will be plans to try again this evening. Today’s agenda will bring the latest US personal income and spending numbers, along with the core PCE inflation gauge. The latter should gather the market’s attention as usual. Wrapping the week up, Fed Presidents from Philadelphia and Cleveland are scheduled to speak this afternoon.


Given the current narrative that predominates in the market – Including the Fed policy tightening and Treasury yields – the USD, once more, holds firm against the Euro on Thursday. Today, European markets kicked off October on the back foot, with stock indices and EUR trading in the red territory this morning. This negative movement early today might be the market catching up with the overnight losses in the S&P 500, Japanese, and Australian shares. Economically sensitive companies like industrials and financials show losses this morning. Today’s economic calendar is a bit quiet in the bloc, with Eurozone inflations among the key data points to watch for.


The Cable, meanwhile, made a recovery on Thursday (+0.35%). The Bank of England suggesting that it is ready to raise rates, and yield differentials moving in the currency’s favor, might be the main upbeat factor in the foreground supporting the Sterling. However, this morning, the GBP is bouncing back with investors and traders following the domestic headlines. The highlighted woes are related to supply disruptions in the country, whether it be fuel shortages or empty supermarket shelves. According to local media, several British gas stations were still dry on Thursday due to a shortage of truck drivers, which was starting to disrupt deliveries to supermarkets, while farmers warned a lack of butchers could lead to a massive cull of pigs.


The Yen rose 0.61% against the greenback on Thursday, its biggest gain since early August. The Japanese market was able to overlook the high U.S yields and focus on the Bank of Japan’s (BoJ) bond-buying plan. Yesterday, the BoJ kept its bond purchases for this quarter unchanged, in an out-of-the-blue decision, which was read as a positive surprise for markets given that some economists had expected a trim. A positive macro release also brought a renewed bullish momentum to the currency. BoJ’s quarterly tankan survey showed that sentiment among large manufacturers rose to 18 in the three months through September, up from 14 in the previous period. In short, this reading tells market players that large manufacturing firms continued to grow in 3Q21, and apparently, at a slightly faster pace than in 2Q21. Against this backdrop, we can expect the market players to continue to digest the Tankan Survey, which may help to push the JPY higher.


The Canadian dollar enjoyed the small crude oil rally, which rose more than 0.6%, consolidating at $75/barrel – near to the highest levels registered in September. On the back of that, the Loonie rose 0.60% against its rival U.S dollar on Thursday. It’s important to highlight that the Loonie is an oil-linked currency by the country’s oil exports, therefore the global energy crisis is unlikely to have a material impact. As a result, the CAD has become the best performing G10 currency in the year to date. However, even though the USD reversed course and took a breather against the CAD, the market narrative seems to play in the greenback’s favor, as the FED is increasingly concerned about inflation and is therefore moving rapidly towards a tapering in November, which should provide support to the USD and weigh on the major currencies, including the CAD.


Once more, the Mexican Peso printed losses (+0.63%) against the USD, with the pair moving towards its weakest level, last seen on the 18th of June. Yesterday, the Central Bank (Banxico) raised its policy rate to 4.75% from 4.5%, as policymakers struggle to slow above-target inflation. Nonetheless, the bank’s decision did little to help the MXN during the trading session. In general, the inflation’s narrative has put pressure on Latin America's central banks, with Colombia also raising its interest rate by a quarter percentage point to 2% on Thursday. Looking ahead, the spike in US Treasury yields will continue to weigh on the EM currencies, including the MXN, as we might see continued demand for USD in the international markets.


The Chinese currency closed the week in positive territory, after ending 0.38% higher against the dollar today’s morning. The CNY’s leap is thanks to the Public Bank of China (PBoC) allowing a stronger Yuan in an attempt to insulate the country against soaring commodity prices. In the meantime, the Yuan’s resilience towards the Evergrande episode also illustrates the prompt PBoC’s reaction to curb the effects of a potential company’s default. On that note, Evergrande Group started returning a small portion of the money owed to buyers of its investment products, weeks after people protested against missed payments. Looking ahead, market players will continue to focus on the energy crisis in the country, after official authorities have told the country’s state-owned miners to produce coal at full capacity for the rest of the year even if they exceed annual quota limits as the worsening power crisis is imminent.


The BRL accumulated a 5% loss against the greenback during September, with the currency registering its seventh negative trading session in a row. Although Brazil’s Central Bank revised its economic growth forecast for 2021, estimating a larger expansion of the economic activity from 4.6% to 4.7%, the bank’s forecast for 2022 is far from optimistic. For 2022, the expectation is for a smaller expansion in the economy: An increase of 2.1% for the Gross Domestic Product figure. Today, market participants will continue to digest the latest remarks from Central Bank chief Roberto Campos Neto, who said that the benchmark interest rate, Selic, will end wherever needed to bring inflation to the target. Participants are already pricing in the effects of an elevated Selic on inflation and medium-term economic growth. In addition, the economic calendar will bring the latest PMI industrial and Current account numbers, both for September.


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