Although the FX markets ignored, in part, the impeachment of President Trump as political noise, the U.S dollar found a decent demand on Wednesday. The dollar index, which tracks the USD against an abroad basket of major currencies, rose 0.29% recovering from the losses of the prior day. This morning, CNN reported that U.S President-elect Biden might announce a new stimulus package worth about $2 trillion. The plan was said to include direct payments to American families and state and local funding. Thus, market players should look forward to President-elect Biden’s stimulus plan. Elsewhere today, the U.S jobless claims (expected little changed at 789,000) may have a market-moving potential. Several Fed members are again scheduled to speak, including Fed chair Powel who is attending a webinar on economics.
The EUR/USD pair closed 0.41% down, erasing the gains from the day before. Apart from stricter measures to combat the spread of the virus across European countries, the European Central Bank (ECB) President Christine Lagarde said they are monitoring exchange rate movements very closely (unsurprisingly). Nonetheless, ECB member François Villeroy was more specific, saying they are watching the negative effects. Today, the publication of the account of the monetary policy meeting of the Governing Council held on 9-10 December 2020, as well as German GDP annual, will drive interest.
Similar to the majority of its G10 peers, the Pound also weakened, sliding 0.2% against the USD on Wednesday, albeit the market has already ruled out the possibility of the Bank of England implementing negative rates. Regarding the Covid-19 situation in England, once again, U.K. Prime Minister Boris Johnson warned intensive care units could be overwhelmed as the country hit its highest daily Covid-19 death toll since the pandemic began. The U.K. reported a further 1,564 deaths on Wednesday, the highest number in a single day. Although the numbers are still worrying, the economic impact of the current lockdown, while severe, will be significantly less than the first lockdown last March, since vaccines will allow a resilient recovery to take place once restrictions are eased, according to market’s analysts.
The Japanese yen weakened 0.1% versus the greenback on Wednesday as the greenback rebounded from near three-week lows and the country experienced a huge resurgence in Covid-19 cases. This morning, Japan's Machine Orders for November defied expectations, rising 1.50% monthly, rather higher than the fall of 6.20% anticipated. Japan's Producer Price Index for December was also surprised, rising 0.50%, well above the expected 0%. Nevertheless, economists warn that this inflation finally reappearing in Japan after 30 years, is due to the increase in energy costs.
The Canadian dollar saw modest gains (+0.1%) thanks, in part, a drop in U.S. Treasury yields, which capped broader gains for the greenback. It was the only G10 currency that managed to keep in the positive territory against the USD on Wednesday. U.S. bond yields dropped as investors showed strong demand for long-dated bonds in an auction. Rising Treasury yields in recent days had supported the greenback, driven by expectations of higher government spending under President-elect Joe Biden's incoming administration. Elsewhere, Air Canada announced Wednesday that it would cut its capacity by 25%, resulting in the loss of about 1,700 jobs at the airline. As the second wave of Covid-19 infections strengthens in the country, economists see an increased chance of the Bank of Canada cutting interest rates closer to zero.
The Mexican peso gave back its gains from the day before amid a choppy trading session. The peso traded 0.33% down against a stronger US. Dollar on Wednesday. In the absence of domestic news, the peso traded most of its time influenced by U.S political headlines, with the U.S House of Representatives voting to impeach President Donald Trump in the spotlight. The strong fundamentals, including that the country is one of the main destinations for foreign investors, due to the lower risk perception and attractive returns, in a global environment of low rates, point out to a USD/MXN downtrend in the medium term.
The Chinese yuan weakened 0.1% against the greenback on Wednesday with investors closely watching the developments in the U.S House and U.S bond’s movements. Earlier today, the country reported a record monthly trade surplus in December, bolstering what is already the world’s best-performing major economy. Both exports and imports rose faster than expected. Exports rose 18.1% from a year earlier in December with imports adding 6.5%, both beating economists’ expectations. The trade surplus in December reached a record high of USD 78.17bn. For the full year, the trade surplus reached USD535 billion, a 27% increase from 2019 and the highest since 2015. Over the day, market players will digest the recent data and keep a close eye on the U.S political scene.
The BRL managed to hold firm against the USD on Wednesday amid upbeat headlines from the service sector. The Brazilian currency closed 0.44% up after services activity rose for a sixth consecutive month in November, more than twice as fast as analysts had expected and suggesting Latin America's largest economy will outperform in Q1 among its emerging peers. Nonetheless, the government is increasing its tension due to its delayed Covid-19 vaccine response, as well as the risk of betting on the wrong horse in the election of the head of the House and the Senate.