The dollar index rose 0.10% against major peers on Monday, but any attempts to climb higher were limited as a weak U.S. employment report encouraged investors to unwind long positions in the greenback, and pushed flows into riskier assets. The latest data from CFTC showed that non-commercial traders increased their net short position in the USD again last week, but only slightly. In general, softer U.S. bond yields, higher US equity markets, and higher commodity prices weigh on the USD and suggest that market participants are enjoying this risk-taking environment. Looking ahead, all eyes are already on the U.S. Consumer Price report on Wednesday that is forecast to show price pressures increased in April. The data will be closely watched as the inflation reading could push up the market’s expectation of when the policy tightening discussion may begin.
The single currency had a poor start to the week yesterday, depreciating 0.26% against the dollar. The Euro’s fall occurred despite the Investor Confidence report signaling and highlighting the optimism surrounding the bloc and the global economic recovery in the second half of 2021. Meanwhile, European countries plan to ease further containment measures and reopen borders in order to support the tourism sector recovery. Despite this positivity, the EUR is still struggling to break a resistance level around the 1.21 mark. Looking ahead, the ZEW Institute will release its German economic sentiment surveys, which should be optimistic reading as the vaccine rollout gathers pace in the country.
Reflecting mainly on the results of the Scottish elections, the Pound rallied +0.94% against the U.S. dollar on Monday. With Scottish nationalists failing to win an outright majority in the Scottish Parliament, market players have started to price out a second independence referendum, or at least, now a lesser likelihood that could thrive. Domestic data was also quite supportive, as the latest British Retail Consortium-KPMG Retail Sales Monitor showed that in the three weeks following the reopening of stores across England and Wales on 12 April, non-food sales increased by around 25% in comparison with the previous month under lockdown. Looking ahead, confirmation that Britain will be moving to step 3 of the easing restrictions roadmap from next Monday boosts sentiment. Elsewhere, Bank of England Governor Bailey is set to give a public speech later today.
The Japanese yen started the week giving back previous gains. The JPY slid 0.23% against the dollar as falling U.S. Treasury yields, higher equity markets, and surging commodity prices suggested that market participants are finding the environment not so favorable for safe-haven assets, including the JPY. The current state has overshadowed the upbeat domestic data, which showed that household spending was up by 6.2% in March from a year earlier, after a 6.6% decline in February. Household spending is a key indicator of private consumption, which accounts for more than half of Japan's gross domestic product. Looking ahead, a more positive market sentiment could weigh on the JPY while investors are waiting for domestic data.
The Canadian dollar began the week on the right footing, gaining 0.29% against the U.S. counterpart and reaching its strongest level since mid-September 2017. The CAD remains well supported by firmer commodity prices and with the Bank of Canada beginning to tighten its monetary policy. Looking ahead, in the absence of relevant stats, fears of the oil supply halt, due to the recent cyberattack on a major oil pipeline in the U.S., has increased Canadian traders’ caution as crude oil is Canada’s biggest export item. Authorities are still assessing what it might mean for Canada, but they say the country is not immune to trickle-down effects — whether it be through gas and oil prices or implications on the national infrastructure’s cybersecurity. Elsewhere, OPEC’s monthly Oil Market Report will be published later today with global demand forecasts and production estimates.
The Mexican Peso experienced a technical correction on Monday, dropping 0.1% against the greenback, which interrupted a sequence of two very positive sessions. The oil market did little to support a sluggish MXN, despite a cyberattack that forced the shutdown of major fuel pipelines in the U.S. and raised concerns about supply disruption. According to media reports, the U.S. East Coast is at risk of a “temporary, but major shortage” of fuels following the cyberattack that forced the pipeline’s shutdown. Looking ahead, the Statistics Institute (INEGI) will publish February’s gross fixed investment, which is expected to be the lower annual contraction due to the improvement in both construction output and capital imports.
The recent weakness in U.S. Treasury yields has been identified as one of the most significant factors driving asset allocation decisions in emerging markets. Thus, the disappointing April U.S. labor market figures have cemented that the Federal Reserve will keep rates lower for longer without altering its quantitative easing program. As a result, the Chinese yuan rose as much as 0.24% against the greenback on Monday, touching its strongest level since June 2018. Consumer inflation in April was modest at 0.9% year-over-year after 0.4% in March. However, producer inflation in April jumped to 6.8% year-over-year up from 4.4% in March, which suggests that the semiconductor chip shortage is going to push consumer prices higher. Looking ahead, the CNY might continue to strengthen on the back of a weaker USD, as well as increased capital inflows and a large trade surplus.
The Brazilian Real kicked off the week well against the U.S. dollar, ending up 0.2% and hovering at a four-month high. Today, investors and traders will digest the minutes from the latest Brazil’s Central Bank (BCB) policy meeting, which may confirm the BCB's harsher tone on inflation and, hence, on its monetary policy. The recent BRL’ leap reflects the expectation of continued increases in the basic interest rate (Selic) in Brazil, which would also help to recompose the interest rate differential between Brazil and the U.S., favoring the flow of dollars to Brazil. The market expectation is that a new 0.75 bps hike in the Selic rate will occur in the next meeting (June). Later today, there will be inflation updates for April which will provide support for the BRL and confirm the BCB’s hawkish stance.