Daily Market Pulse

U.S. Dollar Index tumbles 0.12% on Monday

5 minute read


The U.S. Dollar Index, which tracks the dollar against a broad basket of major currencies, tumbled 0.12% on Monday. The dollar’s weakness has been reflected in the USD positioning as well. Friday’s CFTC report showed the largest net-short USD position in two months, suggesting that the market is becoming increasingly bearish on the USD prospects. On the economic front, the Empire State manufacturing survey fell to 24.3 on supply constraints in May, which could put slight downward pressure on the ISM manufacturing index this month. Looking ahead, rising tensions in the Middle East might start to gain more attention as President Joe Biden has shifted the administration’s stance on the conflict, telling Israeli Prime Minister Benjamin Netanyahu that he would support a cease-fire.


The common currency closed steady (+0.05%) against the greenback amid a light trading session on Monday, after a particularly volatile week prior due to inflationary fears at a global level. The progress in vaccination rollout is positive for the EUR and is leading European countries to lift Covid restrictions, for instance, Italy is planning to phase out its curfew rules after the number of infections ebbed. Meanwhile, it is worth noting the steady upward movement in eurozone yields, in particular in the 10-year bond yield from Germany, France, Spain, and Italy. This is something that the European Central Bank is watching closely, as this could turn into a threat to favorable financing conditions in the region. Looking ahead, the Eurozone employment report for Q1 will be released, along with the final Q1 GDP and trade balance for March.     


The Pound edged 0.27% higher against the dollar after Covid-19 restrictions were eased on Monday. Nonetheless, the U.K government continues to urge caution after recent data shows that there is a rising number of cases of the Indian variant of the virus. Earlier this morning, the Office for National Statistics reported that the unemployment rate was 4.8% for the three months to March, easing from 4.9% in the three months to February and indicating that the U.K jobs market has been broadly stable. Furthermore, the number of payroll employees increased for a fifth consecutive month in April. In general, the decline in the unemployment rate and the rise in payroll employment is further confirmation that the job market is now more resilient to the ongoing restrictions. The positive data is relevant support for the GBP.


Although capped by disappointing economic data, the Japanese yen closed up 0.13% against the U.S. dollar on Monday. Japan’s economy contracted more than expected after GDP fell by 1.8% quarter-over-quarter in Q1, which resulted in year-over-year growth of -1.3%.  Looking ahead, an extension of the weak performance of the Japanese stock market and steady U.S. bond yields could help the JPY. However, Japan's slow pace of vaccinations, as well as political noise due to concerns over the Olympics and the October general elections, might be some obstacles in the way.


Last Friday, the Commodity Futures Trading Commission (CFTC) showed that non-commercial traders increased their net long position in the Canadian Dollar again last week, though long positions are still lower than in late 2017. This bullish sentiment confirms that the Loonie has been supported by strong fundamentals – from higher commodity prices to a hawkish stance by the Bank of Canada. On that note, the currency posted further gains (+0.22%) on Monday, consolidating previous gains and reinforcing its upside channel trend. Looking ahead, investors are already waiting for inflation data (Wed). which will be closely scrutinized by the market, potentially triggering volatility in the session.


The oil-linked Mexican peso rose 0.47%, tracking higher oil prices on Tuesday despite the country seeing a higher unemployment rate. The crude oil (WTI) gained 1.13% based on longer-term optimism tied to strong demand recovery in the U.S., Europe, and parts of Asia. Domestically, capping further MXN’s gains, official data reported that the Mexican unemployment rate came in at 4.4% in Q1, an increase of 1% compared to 3.4% in the same period of 2020, before the impact of the pandemic. Looking ahead, traders and investors will wait for economic activity numbers for April while inflationary pressure continues to fuel expectations around the Central Bank's next decision and the impact on the currency.


A resurgence in Covid-19 cases and restrictions among Southeast Asian economies along with disappointing Chinese data saw investors reducing their appetite for risk assets. As a result, the Chinese yuan started the week on the wrong foot, dropping 0.04% against the greenback. Yesterday, official data showed that retail sales growth fell to 17.7% year-over-year in April, while industrial production growth decreased to 9.8% year-over-year. In general, the disappointing figures hurt market sentiment, given that the country is a major destination for metals and agricultural goods. In other news, China supports developing countries' appeal for the waiving of intellectual property rights for Covid-19 vaccines, which is seen as an important support for the global economic recovery.


The Brazilian Real kicked off the week almost unchanged (-0.01%) against the dollar, with investors reacting to weaker-than-expected figures from China and a resurgence in Covid-19 cases in major Asian economies. Domestically, attention is still focused on the ongoing investigations (Covid CPI), which investigates actions and omissions of the federal government during the pandemic and monitors any diversion of resources by governors and mayors. Looking ahead, the Senate will start to hear the testimonies of former ministers Ernesto Araújo (Foreign Affairs) and Eduardo Pazuello (Health), today and tomorrow respectively. The hearings may represent new unfavorable chapters in the Presidency of Jair Bolsonaro. There is no material data to be released for today.


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