Daily Market Pulse

Dollar pauses amid upbeat market mood and inflation readings


The upbeat market mood seems to be getting traction as the U.S. Dollar Index, a coefficient used to value the greenback against a basket of six major currencies, remained subdued while risky assets pushed higher. Yesterday, U.S. stocks hit new all-time highs while U.S. Treasury Yields continue to recover from a significant dip last week, and Crude Oil prices remained above USD 70 despite the OPEC + fallout. However, as appetite sustains, risks are still latent as coronavirus cases continue to spike, rising by 94% in the past two weeks. Coming up, U.S. consumer price index is set to show a moderate drop to 4.9% with a pick up in core inflation indicators of 4%. Additionally, Raphael Bostic, who is due to speak later today, will hint at the Fed’s interpretation of the inflation released ahead of tomorrow's testimony of Jerome Powel before Congress.   


The EUR remained relatively unchanged against the USD, recording moderate gains of 0.08% during yesterday’s trading session. A hawkish European Central Bank (ECB) seems to be adding to the risk-on sentiment in the market following the change in approach from Policymakers. Market participants believe that the ECB will start tapering its pandemic-related assets purchases after its September meeting and stop buying by the end of March. The change is coming off the back of last week's ECB strategy review meeting which shifted from setting a 2% ceiling on inflation to allowing inflation to fluctuate higher than its 2% goal. Today, market participants wait for the German Harmonised Index of Consumer Prices and U.S. inflation figures which might swing the pair depending on results.  


The Pound Sterling recorded mild gains against the greenback amid positive reopening expectations and mounting coronavirus woes. U.K. Prime Minister Boris Johnson called for caution ahead of Monday’s reopening, as fears of witnessing over 100 thousand daily cases during the summer start to sound unappealing even with high inoculation ratios. The Bank of England is due to release its Financial Stability Report which will provide the Fed’s assessment of the outlook for the stability and resilience of the financial sector. 


The Japanese Yen edged 0.25% lower against the dollar amid risk-on sentiment recovering in the market and recent coronavirus woes and restrictions in Japan. Extended COVID-19 restrictions continue to weigh on the economy, dragging behind major economies during the first half of the year. Additionally, the low activity continues to accentuate the liquidity trap and deflationary influences which Japan has been immersed in for decades, suggesting that policymakers will remain accommodative in their approach to monetary policy. Later today, Industrial production, capacity utilization, and Foreign Direct investment figures are due to be released in Japan.  


The Loonie managed to close unchanged (0.03%) during yesterday’s trading session, after recovering from a sharp 0.53% drop due to the resilience in Crude oil prices and the wider U.S. - Canada yield spreads which continue to support the Canadian Dollar. In addition to that, market participants are most likely to remain cautious ahead of tomorrow's much expected Bank of Canada Monetary Policy meeting which might release hawkish expectations for the Loonie. Market participants expect the BoC to taper its QE purchases in July’s meeting based on better than expected job reports on Friday and expectation that the trend will sustain during the months to come, which will expose the Canadian Dollar to a strong rally like the one we witnessed after the first shift in monetary policy in the previous quarter.  


The Mexican Peso remained virtually unchanged, recording 0.06% against the Dollar due to recovery in risk sentiment which has supported riskier asset profiles while a pick up in tourism supports the MXN and a resurgence in COVID-19 cases which put jeopardy the recent recovery in the hospitality and tourism sectors. However, Mexico's National Statistic Institute released new figures showing that 4.59 million tourists visited Mexico in May, of which 2.66m were international tourists. The increase of international tourists represents a yearly variation of 198% due to the impact of the pandemic during last year's lockdown. Even if the tourism sector remains behind its pre-pandemic levels, it seems to show the right signs of recovery with an important pick up in May and this is expected to sustain throughout the summer.    


The Chinese Yuan remained unchanged against the USD during yesterday's trading session. Sun Guofeng, head of PBoC’s monetary policy department, said during a briefing that China’s monetary policy basically returned to the pre-pandemic levels during the first half of the year.  Despite the recent woes of the Chinese economic slowdown, the spokesman highlighted that the PBoC has been in a leading position among global macro policies and that the bank will continue to provide an autonomous and appropriate monetary environment for the economy to bolster growth in H2. Policymakers are keen on driving any monetary policy decision based on domestic price levels and economic data, and producer prices are expected to moderate in Q4 and 2022.


The Brazilian Real advanced 1.61% against the dollar amid restoring market confidence globally and market participants shrugging off political risk in the pricing of the currency. The political scenery continues to deteriorate, especially as President Bolsonaro continues to generate friction with the Supreme Court and Congress. Fundamentals are still unchanged, with the BCB looking to sustain its hawkish monetary policy while inflation continues to spike up based on economic activity, higher energy prices, and the national water crisis. The Finance minister Paulo Guedes gave a speech defending the current tax bill which is looking to raise the lower income tax bound from R$ 1,900 to R$ 2,500 in addition to introducing 20% tax to dividends while the government faces pressure to not increase taxes on the wealthy.   


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