Since the “Blue Wave” rolled into Washington last week, market players have begun to price increased Treasury issuance, as well as higher inflation expectations, both major catalysts that have been providing a significant positive impact on U.S yields (rising as high as 1.148% during the previous session). Thus, due to the high positive correlation between USD and yields, the U.S dollar index that tracks the greenback against a basket of major currencies edged up 0.18%, taking the USD to three-week highs. Once again, U.S politics will be at the fore today as Democrats have introduced a resolution to impeach U.S President Trump for a second time, setting the stage for a vote on Wednesday. Moreover, November’s JOLTS job openings report will also be on the radar.
The single-currency dipped 0.32% against a stronger USD, sliding to three-week lows on Monday. The weaker tone is set to remain in the market as Covid-19 concerns continue, particularly with Japan finding a new virus variant that differs from the U.K and South African strains. Today, in the absence of domestic headlines and releases, market players will be looking for speeches from members of the U.S Federal Reserve’s Board of Governors. Any upbeat comments about the U.S economy could limit demand for the safe-haven USD as global risk-sentiment improves.
The recent USD recovery, driven by higher U.S. yields, sparked a dollar bid against the pound, which led the GBP/USD pair to fall to two-week lows on Monday. Domestically, further Covid-19 restrictions continue to undermine the economic activity with the U.K. Prime Minister Boris Johnson warning that his government would have to tighten lockdown restrictions if people fail to follow the rules. Elsewhere, Bank of England policymaker Silvana Tenreyro said the bank could have to deliver more stimulus and leave the option of negative interest rates open.
The USD´s correlation with U.S real yields remained firm on Monday, since the JPY has been very sensitive to yield differentials, the USD/JPY pair reached its highest levels in a month. The Japanese yen slid 0.15% for the fifth straight trading session. If investors continue to price increased U.S Treasury issuance, and higher inflation expectations in the U.S economy, which are main catalyzers for further gains on yields, the JPY should remain under pressure for some time. Looking ahead, with traders back to work after Monday’s holiday, the current account and trade balance figure will be eyed for clues as to whether the country is benefiting from the recent uplift in regional trade.
The Loonie fell 0.43% against the U.S dollar on Monday as the U.S Treasury yields continue to increase, providing additional support to the USD. Meanwhile, oil and agriculture commodities were under pressure amid rising Covid-19 cases in China which was bearish for the CAD. The Bank of Canada’s latest business outlook survey, conducted from mid-November to mid-December, pointed to a continued recovery supported by strengthening domestic and foreign demand, particularly in goods-producing sectors. Nonetheless, companies expect the recovery to be uneven. Still, survey results point to increased pressures on input costs, largely related to rising freight costs, which is positive news, since the low inflation remains a pain point to the country.
The new variant of the Covid-19 first detected in the U.K has been confirmed in Mexico for the first time on Monday. The news promptly raised concerns about whether the health authorities will be able to curb and track the spread of this highly contagious variant of the virus. Also reacting to the news, the Mexican peso retreated 0.22% to hit a three-week low against the USD. The country is home to the pandemic’s fourth-highest death toll globally. Nonetheless, the MXN’s losses were capped after the National Statistics Institute reported that Mexican industrial production rose 1.1% in November from the previous month, extending its recovery to six consecutive months following sharp declines in April and May.
The Chinese yuan slid 0.07% against the U.S dollar as the prospect of large stimulus measures drove U.S Treasury yields higher, which also kept the USD firm against major peers on Monday. China's consumer prices rebounded 0.2% year-on-year in December, official data showed yesterday, as food prices picked up due to weather difficulties and rising demand ahead of the Chinese New Year festival. Thus, with economic activity remaining robust and inflation likely to rise, analysts believe China’s Central Bank will tighten policy this year.
The Brazilian real tumbled 1.31% against the U.S dollar for the fourth trading session in a row, on Monday. The BRL took a hit from the international headlines, with China reporting the biggest daily increase in Covid-19 infections in more than five months, raising concerns about a delay in the pace of the global economic recovery. Meanwhile, domestically, Brazil’s mass inoculation campaign continues to spark harsh criticism, with market players also dissatisfied by the pace of the government’s reform agenda. Today, consumer prices figures for December are largely expected.