Daily Market Pulse

The risk-on environment is fading

6 minute read


The Dollar Index was almost unchanged (-0.09%) against a basket of major currencies yesterday.  Applications for first-time weekly jobless claims totaled 709,000 last week, much lower than previous expectations and it shows a decline from the previous week. However, a continuation of elevated levels of unemployment amid a resurgence in daily Covid-19 cases raised concerns about a recovery in the labor market. Furthermore, the prospects for another Covid-19 relief package before the end of the year diminished rapidly yesterday, as Republicans and Democrats signaled they did not intend to budge from their long-held positions on spending levels. Today, the market continues to trade based upon Covid-19 figures, lockdown measures, and its impact on the global economy, as well as, headlines from the Nov. 3 vote, as President Donald Trump continues to make legal challenges.


The common currency bounced a bit (+0.23%) against the USD yesterday as the U.S is now dealing with a surge in Covid-19 figures which somewhat could have protected the Euro. The EUR also managed to keep firm after Industrial production in September was down by 0.4% in the eurozone and unchanged in the European Union. The reading showed that the eurozone industry continued to recover, but September production figures were distorted by the poor performance of the Italian industry, because Germany, France, and Spain recorded increases of 1.7, 1.5, and 0.6% respectively, indicating that underlying developments remain solid. Today, the GDP report should have minimal impact on the euro with market participants widely expecting a double-dip recession in the eurozone starting in the fourth quarter, which may have already been priced in over the week.


The GBP shed 0.81% against the USD on Thursday for the second straight session. Yesterday, market participants worked out the latest UK GDP, which grew by a record 15.5% in Q3, however, the data was put in another perspective. Firstly, the GDP remained more than 8% below its February level at the end of Q3. Secondly, at the end of Q3, the UK economy was twice as far below its peak than France and Germany, and more than three times worse off than the U.S. Finally, the service sector makes up 80% of UK GDP, which is being hit hard by the Covid-19 pandemic. As a result of all this, the Pound saw some losses. Today, the market is expected to continue to trade on the back of Brexit and U.S stimulus pack headlines.


The USD eased 0.28% against the JPY in the Tokyo trading session on Thursday, on the back of a fall in U.S long-term interest rates. Also, earlier this morning, the Japanese yen edged 0.20% higher for the second straight session as investors moved back into the safe-haven currency on concerns that a successful test of a Covid-19 vaccine might not be enough to offset the economic damage, as well as its availability, is doubtful. Despite a recent rise in price, the JPY remained down by 1.5% against the greenback this week, its sharpest weekly drop in almost five months.


Similar to the oil-linked Mexican peso, the weakness in oil prices added to pressure on the Loonie, which tumbled down almost 0.6% against the greenback on Thursday. According to the International Energy Agency (IEA), global oil demand will not recover until well into 2021, even with a Covid-19 vaccine. The IEA’s prospect led the crude oil futures to close down around 1% at $41.11 a barrel. Elsewhere, the market also watched Senior Deputy Governor Wilkins delivering her final speech as a member of the Governing Council. The key comment there was that the economic recovery will need support for a while and the pandemic remains a formidable risk. She also highlighted that boosting productivity is now more important than ever, as well as guaranteed that the Bank of Canada will do its part to help keep the economy stable by making sure inflation remains under control.


The MXN took a hit from the weakness in the oil market after the International Energy Agency (IEA) raised doubts about a quick post-Covid-19 pickup in demand. The oil-linked Mexican peso tumbled down 0.83% against the USD after the IEA cut its forecast for oil demand growth by 400,000 barrels a day to show a decline of 8.8 million barrels per day this year and said that Global oil demand will not recover until well into 2021, even with a COVID-19 vaccine. On the other hand, the losses were limited as the Bank of Mexico kept its benchmark interest rate unchanged at 4.25% despite expectations of a 25-basis-point cut to 4.0%.


The CNY slid 0.22% against a rising USD on Friday morning in Asia, as a risk-on sentiment was hammered by a rise in U.S and European Covid-19 cases, prompting investor worries that the pandemic might create wider disruption on the global economy. Also, traders are still awaiting further developments as to China’s latest clampdown in Hong Kong, which would add pressure to the yuan. Industrial production and retail sales figures in October are scheduled for Sunday and are expected to point towards robust growth amid the Covid-19 global pandemic.


The BRL fell 1.24% against the USD on Thursday on the back of U.S aid package headlines. The risk-on environment faded gradually after the prospects for another Covid-19 U.S relief package before the end of the year diminished rapidly late yesterday. Also, the uncertainty over the vaccine’s availability weighed on the fragile BRL, as well as its LATAM peers. Domestically, indications of the lack of communication and government consensus came once again from the Ministry of Economy. By the time that officials signaled that the government intends to speed up microcredit loans at lower interest rates instead of direct payments, the Economy Minister Paulo Guedes admitted the possibility of extending emergency aid in case of worsening in the Covid-19 pandemic in Brazil. Today, investors will wait for the IBC-Br Economic Activity index, which reflects the preliminary gross domestic product data.


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