Daily Market Pulse

U.S.-China talks and Treasuries sell-off

5 minute read


The Dollar Index showed modest gains of 0.42% against a basket of peers yesterday, as the USD found a strong demand due to Treasuries sell-off.  The 10-year yield sold off significantly yesterday, reaching new cycle highs north of 1.75%, as the market continues to price higher growth and inflations after the outcome from the Fed policy meeting. However, further USD’s gains were capped, after the U.S. new weekly jobless claims unexpectedly rose last week even amid a wave of abating social distancing restrictions and improving weather. The report brought an additional 770,000 claims vs. 700,000 expected. There is no major data to be released today.


The single currency gave back (-0.57%) its gains from the day before, as investors are still concerned about the yet elevated number of new Covid-19 cases across the bloc. Although European countries, including Germany, France, and Italy, are restarting using AstraZeneca's vaccine after the European Medicines Agency gave the shot its endorsement, the vaccination rollout appears to be in disarray on the Continent while in the U.S. it is progressing nicely. It is important to note that the spread between 10-year German and U.S yields has widened above 200bps. This differential should continue to widen, adding further pressure on the EUR/USD pair. Today’s economic calendar will bring the Germany Producer Prices for February.


Unsurprisingly, the Bank of England (BoE) kept the Bank Rate at 0.10% and maintained its targets for the stock of government and corporate bond purchases at £875B and £20B, respectively, in line with the consensus. On the other hand, the BoE is more optimistic towards the near-term path for GDP, as the bank now expects GDP to recover to its pre-Covid peak in Q4, one quarter earlier than it predicted in February. Nonetheless, the Cable was not able to enjoy the upbeat tone and took a hit from broad dollar demand. Looking ahead, investors will digest the recent February’s Public Sector Borrowing numbers, which showed a high level of public borrowing in February due to a surge in central government expenditure.


The Japanese yen inched down 0.07% against the U.S. dollar on Thursday as investors were waiting for the result of the Bank of Japan’s policy meeting. Today, market participants will digest the policy decision and the fresh Consumer Price Index (CPI) numbers. According to the BOJ Press Conference, the BoJ will allow 10-year yields to rise further to 0.25pp in order to improve the sustainability of the monetary policy. Raising rates are seen as helpful to protect the financial system and the real economy. Regarding CPI reading, National CPI deflation moderated to -0.4% in February, from -0.6% in January, in line with the consensus. CPI deflation probably will be given a new lease of life when the Go To travel scheme is reinstated, but the underlying trend here is firmly towards inflation.


The Canadian dollar weakened against its U.S. counterpart on Thursday as the ADP Employment Change report came well below the market’s consensus. The report indicated that private businesses lost 100,800 jobs in February compared to analyst consensus which called for the creation of 190,000 jobs. The Loonie also took a hit from higher U.S. yields, which moved to new highs and supported the USD as traders continued to bet on higher inflation. Moreover, the oil prices did little to help the CAD, as the pandemic situation in Europe continued to dampen the expectation of a surge in oil demand.


Recent data showing that the country’s economy contracted by 4% last month compared to the same month a year earlier, led the Mexican Peso to edge 0.5% down against the U.S. dollar, on Thursday. According to the official statistics department (INEGI), industrial activities had an annual drop of 4.2% in February, while the services sector decreased 4.3%. Looking ahead, the Fed’s dovish stance leaves more room for Mexico’s Central Bank, which under this policy guide could maintain a favorable perspective for the Mexican economic recovery. Against this backdrop, an upward path for the Peso is expected throughout this year, however the rising political risk and worsening Covid-19 pandemic could be a hurdle.


The Chinese yuan closed flat against the U.S. dollar ahead of the outcome from the first talks between Chinese leaders and top U.S. officials. Today, once again, the meeting will be in the market spotlight, with market players keeping an eye on the yuan, Chinese stocks, and commodity prices – areas more affected by the meeting’s outcome. According to media reports, it hasn't started well, with the two sides immediately descending into bickering and recriminations over human rights, trade, and international alliances, suggesting a détente will be hard to achieve.


Investors continued to react to the interest rate hike on Thursday, with the Brazilian Real inching up 0.44% against the greenback and outperforming its LatAm peers. Brazil's COPOM increased the Selic rate 75bp to 2.75% on Wednesday. The Central Bank highlighted that inflation and inflation expectations have been rising, due to the recent rebound of commodities prices and a weak BRL. The worsening of the pandemic is the main downside risk to inflation, as it may delay the economic recovery, according to the Bank. Covid-19 update: Brazil registered a daily decrease of 2,659 deaths (2,736 on the previous day) and 87,169 confirmed cases (from 90,830). The 7-day moving average of deaths increased to 2,096, from 2,031 on the previous day. The total number of deaths now stands at 287,795, with 11,787,600 confirmed cases.


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