U.S stock markets posted modest gains - the benchmark S&P 500 gained 1.26% - while the USD fell 0.26% against a broad basket of major currencies on Tuesday, with optimism buoyed by vaccine roll-outs tempered by uncertainty over ongoing talks on Brexit and the U.S. fiscal stimulus. Market participants will pay attention to the Federal Reserve’s last policy meeting of the year and its subsequent press conference, where Chairman Powell will likely highlight the importance of fiscal stimulus and the progress toward a Covid-19 vaccination. Moreover, November’s U.S retail sales report will be released this afternoon and is likely to show some retraction due to Covid-19 restrictions imposed over last month.
The common-currency showed slight gains (+0.07%) against the greenback on Tuesday amid inner pressure in Europe for quick approval of a vaccine as infections and deaths rose in the region. Germany is also pushing the European Union to expand the aid limit for firms hit-hard by the pandemic. There is a busy data docket ahead, with a bulk of eurozone Flash PMI data for December which is due out today. Markets will also watch for the final Fed/FOMC policy decision of the year, where the Committee should provide further guidance around rates and the pace of asset purchases.
Rumors that a Brexit deal may be moving into view caused the GBP to print gains over 1% against the USD and British bonds to fall amid a volatile trading session on Tuesday. As the time is running out, the U.K. government is also attempting to drive forward other trade negotiations, with Prime Minister Boris Johnson to visit India for talks in January and a continuity deal signed with Mexico. Turning to data, the latest labor market report released yesterday was weaker overall but by less than expected, suggesting that the extensions of the furlough scheme (to the end of November and then the end of March) started to limit the impact Covid-19 has had on job losses. Earlier this morning, the Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) 12-month rate was 0.3% in November 2020, down from 0.7% in October. This significant drop comes amid evidence that shop prices are falling in the run-up to Christmas, as retailers race to clear stock and deal with a "deepening" High Street crisis.
The yen printed solid gains (+0.36%) against the U.S dollar on Tuesday amid mixed data. Japan has booked a trade surplus of $3.5 billion in November, the fifth consecutive monthly surplus, according to data released by the finance ministry. However, Japanese exports fell 4% last month while imports dropped 11% from a year earlier. Exports of vehicles, semiconductors, and other manufactured items showed the biggest declines. Markets will closely watch for the outcome of a meeting by the Federal Reserve, which someway could spill over to the JPY. No change in interest rates is expected, but the Fed could announce steps to try to offset the pandemic's increasing drag on growth.
The Canadian dollar edged higher 0.50% against the USD after mixed data on Tuesday. On the one hand, Housing Starts climbed to 246,000 in November, up from 215,000 beforehand. On the other hand, Manufacturing Sales slowed to just 0.3% in October, down from 1.5% in the previous release. Today, the market should be a bit more hectic, since there are key events on both sides of the border. The highlight of the day will be the FOMC policy meeting in the U.S, which could have a major effect on the movement of the USD. Meanwhile, Canada releases November inflation data that is expected to slow to just 0.0%, a drop from 0.4% in October. Low inflation is reflective of weak economic recovery.
The Mexican peso jumped as much as 1.74% against the greenback and outperformed its peers on Tuesday after Mexican Congress put off a vote on the controversial Central Bank bill. The bill was under intense criticism from bankers, rating agencies, and even members of the government, which said that the reform bill would jeopardize the central bank’s autonomy by requiring it to buy foreign currency in cash that banks are unable to put into the financial system. Looking ahead, the focus will be on a Central Bank meeting on Thursday where policymakers are expected to hold the benchmark interest rate steady at 4.25%.
The Chinese yuan rebounded 0.14% against the USD on Tuesday, breaking a five-day sequence of losses. The CNY was buoyed by impressive macroeconomic data that highlighted a strengthening recovery, indicating a world-beating growth trend in 2021. In November, industrial production climbed at an annualized rate of 7%, the best performance since March 2019. Moreover, retail sales surged 5% year-over-year in the same month, marking the fourth consecutive monthly retail trade gain. This was also the fastest growth in retail sales since December 2019. Nonetheless, the central bank confirmed that it would limit or even reduce capital inflows to place a cap on the yuan’s appreciation.
Yesterday, the Brazilian Real closed up 0.68% against the USD as progress toward a Covid-19 vaccination in developed economies and a calmer external environment, all supported a more risk-on appetite. However, BRL’s gains were capped after the Copom minutes clarified conditions that would lead the committee to jettison its “low for long” forward guidance. Two points are worth highlighting. First, the committee stated that the latest inflation readings were higher than expectations and, despite the expected deceleration of food prices, inflation will likely remain high in December. Second, the Copom also stated that a continuation of fiscal policies to respond to the pandemic or frustrations with the reform agenda may increase risk premia and that the high fiscal risk continues to generate an asymmetrical upturn in the balance sheet.