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Bonds and FX markets will continue to walk together

USD

The dollar index, which tracks the greenback against a basket of major peers, slid to an almost-one-month low after falling 0.03% on Thursday. The U.S. dollar is set for a 0.58% decline for the week, extending the 0.9% slide from the previous week. The main catalyst behind the recent USD’s depreciation is the benchmark 10-year Treasury yield, which dipped to a one-month low of 1.528%, from as high as 1.776% at the end of March, despite Thursday's stronger-than-expected retail sales and employment data. On that note, last week’s initial jobless claims report was solid, falling to a low of 576,000 new jobless claims. Last month’s US retail sales were also solid. Although not unexpected, sales surged in March, rising by 9.8% month-to-month, driven largely by the $1,400 stimulus cheque and the better weather in March. Looking ahead, bond and FX markets will continue to walk together, reflecting the dubious inflationary pressure (transitory or not) and monetary stimulus.

EUR

The Euro inched lower against the greenback on Thursday in a choppy trading session as investors balanced upbeat data showing that U.S. retail sales rebounded substantially in March amid a continuing fall in the U.S. Treasury yields. In general, the EUR is set for a 0.5% weekly advance, adding to the previous period's 1.3% high. Meanwhile, European shares also closed at a record high yesterday as a surge in commodity prices lifted mining stocks and a slate of positive earnings reports reduced worries about the pace of vaccinations (due to the delay of Johnson & Johnson vaccines rollout). The final Eurozone inflation figures for March are published on today's calendar, along with February’s trade balance.

GBP

Yesterday, the British Pound was almost unchanged (+0.04%) amid a lack of fresh upside developments. Although the GBP had a strong first quarter, helped by the pace of the UK’s vaccine rollout and by a lessening of negative rates expectations, the scarcity of fresh positive news in April has led the GBP to struggle to consolidate previous gains against the greenback. On the political front, European Commission Vice President Maros Sefcovic will meet later today with British Minister David Frost to talk (and to resolve) significant differences over the implementation of the Northern Ireland Protocol, the special arrangements designed to prevent a hard border with the Republic of Ireland. Loyalists and unionists are vehemently opposed to the Northern Ireland Protocol, which has created new economic barriers between the region and the rest of the UK. Any negativity from the negotiation could weigh on the GBP.

JPY

Once more, the Japanese yuan printed gains (+0.21%) and on Thursday registered its fourth positive trading session in a row.. In general, the JPY now trades within the mid-March range, after recovering all losses registered at the beginning of the month. The positive JPY performance is mainly thanks to the successive falls in the 10-year yield, which printed a one-month low yesterday and slid to the downside of the recent 1.6%-1.7% range. On the economic front, Japanese manufacturers’ sentiment strengthened to a more than two-year high in April, with strong demand in the global chip market improving prospects for exporters, according to the Reuters Tankan poll. The chip scarcity is a result of increased demand from the consumer electronics industry, winter storms as well as a fire at a Japanese chip-making factory.

CAD

The Loonie slid 0.18% against the U.S. dollar on Thursday, with the pair moving sideways within a narrow range since the beginning of April. Employment in Canada increased by 634,800 jobs from February to March, with all sectors adding jobs according to the March ADP Canada National Employment Report. However, the report also suggested that the services sectors, including leisure and hospitality, sustained recovery will be determined by the path of the Covid-19, the number of infections, varying restrictions as well as changes in business practices that lead to an increased reliance on automation post-pandemic. Looking ahead, the CAD might continue to receive tailwinds from far more optimistic oil markets, which is set to a one-month high driven by more positive demand forecasts.

MXN

The Mexican peso inched 0.56% up against the greenback to consolidate previous gains. Now, the MXN is hovering over its two-month high, which is a strong resistance level to be broken. In general, although the currency continues to be traded in a bullish channel, driven mainly by the external environment (positive data from the American economy and higher commodities prices), future gains will depend on solid domestic fundamentals. Relatively high interest rates are a favorable incentive for capital attraction, investment, and domestic economic growth, however, sustained economic recovery, as well as a controlled Covid-19 pandemic, should be the main foundation to further MXN’s appreciation.

CNY

The Chinese yuan showed further gains against the greenback amid a raft of economic data, on Thursday. The CNY edged 0.11% higher after official data showing that GDP growth rose to 18.3% year-on-year in Q1, albeit with a powerful base effect at work from the big drop in GDP last year. Besides, China’s industrial production came in at 14.1%, below expectations of 17.2% in March. Both readings suggest that the country is recovering at a solid pace, however, growth is expected to moderate later this year as the government may turn its attention to containing financial and domestic risks (i.e. stock bubble, debt risk, and rising house prices) in overheating parts of the economy and begin to withdraw the emergency support measures announced last year.

BRL

The Brazilian Real edged 0.86% up against the U.S. dollar, extending gains for the third straight trading session. The BRL’s leap came after official figures showing that Services activity in Brazil surged in February, expanding at its third-fastest rate since comparable records began a decade ago. The reading was welcomed by investors and policymakers, as evidence the economy was firmly on the right track before a deadly second wave of the virus hit the country, and could ease worries that the economy contracted in Q1. However, the prospects for the services sector for March remain blighted as restrictions on mobility were imposed to curb the virus spread. Elsewhere, pandemic continues to claim lives in the country as it registered a daily increase of 3,774 deaths and 80,529 confirmed cases. According to state health department figures, Brazil has vaccinated about 11.7% of its population.

Quick Insights

USD: Retail sales surged in March, rising by 9.8% month-to-month, driven largely by the $1,400 stimulus check

USD: Retail sales surged in March, rising by 9.8% month-to-month, driven largely by the $1,400 stimulus check

EUR: European shares closed at a record high while EUR edges lower

EUR: European shares closed at a record high while EUR edges lower

GBP: Talks to resolve significant differences over the implementation of the Northern Ireland Protocol are expected to today

GBP: Talks to resolve significant differences over the implementation of the Northern Ireland Protocol are expected to today

JPY: The positive JPY performance is mainly thanks to the successive falls in the U.S. 10-year yield

JPY: The positive JPY performance is mainly thanks to the successive falls in the U.S. 10-year yield

CAD: CAD has been moving sideways within a narrow range since the beginning of April

CAD: CAD has been moving sideways within a narrow range since the beginning of April

MXN: Future gains will depend on solid domestic fundamentals

MXN: Future gains will depend on solid domestic fundamentals

CNY: GDP growth rises to 18.3% year-over-year in Q1, although with a powerful base effect at work from the big drop in GDP last year

CNY: GDP growth rises to 18.3% year-over-year in Q1, although with a powerful base effect at work from the big drop in GDP last year

BRL: Economy was firmly on the right track before a deadly second wave of the virus hit the country

BRL: Economy was firmly on the right track before a deadly second wave of the virus hit the country

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