Daily Market Pulse

Lingering FOMC minutes and Covid woes weigh on market sentiment

6 minute read


The U.S. dollar index, commonly used to track the performance of the greenback against a basket of six major currencies, extended gains (+0.97%) during yesterday's trading session amid lingering FOMC minutes and a broader risk-off sentiment, which underpinned the demand for the safe-haven dollar. Narratives around the vaccination efficiency fading away with time, in combination with a growing Delta variant, keeps the market mood sour, with stocks under pressure and treasury yields edging lower amid increasing demand for risk-free securities. In order to counter the fading efficiency of the vaccine against the virus, health officials rush Americans for booster jabs in an effort to control the spread of the third wave, which sustains worrisome figures in the country. On the data front, Unemployment readings underpinned the dollar run, after the release of upbeat results with Jobless Claims exceeding expectations posting 348k vs 363k expected, which suggest that employers have slowed down the pace of letting people go, although market participants are still missing inputs to help determine whether hiring rates are growing at a faster pace. However, the Philadelphia Fed Manufacturing Survey failed to impress, with a soft 19.4 vs 23 previously anticipated. Despite the momentum, the broader move seems to have eased during the early hours of today’s session.


The EUR remained subdued against the greenback, recording new year-to-date lows after dropping 0.28% during yesterday's trading session. Covid woes, combined with doubts around the efficiency of vaccines, continue dampening market confidence, triggering a significant sell-off for the common currency. Data wise, current account figures released yesterday by the European Central Bank (ECB) suggested that the Net flow of EURs into the old continent has increased significantly, amid a trading surplus from the bloc. The Current Account figures from May were revised up from EUR 4.3 billion to EUR 6.5 billion, while June's net flow was posted at EUR 24 billion. Additionally, Produce Price index figures in Germany released upbeat results, recording 10.4% year over year vs 9.2% previously anticipated, although it failed to ignite any significant moves in favour of the EUR. Market participants remain cautious as fears that the Eurozone growth has peaked continue to deteriorate investors and consumer confidence.


The Pound Sterling closed out yesterday’s trading session 0.86% lower against the dollar amid better than expected jobless claims and a broader dollar strength derived from lingering FOMC minutes and Covid jitters. A light U.K. economic calendar and Fed taper talks weigh on cable as U.S. labor market shows signs of improvement, increasing prospects of monetary adjustments sooner rather than expected. Moreover, earlier on in today's session, Retails sales failed to impress, posting 2.4% year over year, underperforming expectations set at 6%, suggesting that the impact of the Delta variant has kept shoppers subdued, diminishing prospects of a recovery for the United Kingdom.   


Amid growing Covid cases in Japan, including a recent sharp spike in daily cases, the Japanese Yen remains in the crossroads surrounded by uncertainty and renewed optimism thanks to government interventions. The Japanese Yen closed relatively unchanged against the dollar, although the price had a volatile session, swinging in a 0.7% range. The recent announcement from the Japanese cabinet approved a JPY 9.27 billion/ USD 84.5 million emergency budget to help the country’s self-defense forces carry out medical aid amid the coronavirus pandemic has helped ease the bullish run from the greenback. 


The Canadian dollar recorded extensive losses against the greenback, closing out 1.36% lower in yesterday's session and resuming the sell-off during the early hours of today, posting a 0.76% drop so far. The bearish move comes off the back of global risk aversion and a sharp decline in crude oil prices. The West Texas Intermediate (WTI) managed to extend up to 3% in losses on Thursday and taking into account today's bearish profile, this would account for 7 consecutive sessions of WTI extending losses weighing on the commodity-linked Loonie. The correction in oil prices does not seem to have bounced back before China's fundamentals recover, although market participants follow from the edge of their seat development in the Middle East amid the return of the Taliban to Afghan power.  


The Mexican Peso remained subdued against the dollar, amid risk-off sentiment in the global market deteriorating the demand for riskier assets. Mexico’s President Andres Manuel Lopez Obrador (AMLO) expressed his support for the latest decision by Banxico of hiking interest rates to 4.5%, although the President highlighted the lack of focus on economic growth. The President reiterated that while he understands the decision made by policymakers to focus on controlling an annual inflation rate of 5.71%, he would expect Banxico to look at both inflation and growth, instead of inflation alone. AMLO stressed that his government would do anything it can to avoid an increase in prices while also stimulating economic growth. 


The Chinese Yuan retraced 0.16% against the dollar, breaking the 3-week support amid broader dollar strength and Foreign equity outflows due to the regulatory crackdown. Stocks on both mainland and Hong Kong fell upon Beijing tightening regulation on Private businesses, recording losses of over 2%. Moreover, the People’s Bank of China announced in the early hours of the day that it will hold Interest rates unchanged, although market participants are expecting policymakers to make targeted cuts of around 50 bps in the reserve requirement ratio in the fourth quarter of 2021, and by a further 50 bps cut in the first quarter 2022.     


The Brazilian Real remained relatively unchanged during yesterday's trading session, following the downward breakthrough from Wednesday. Market participants warned the Brazilian Central Bank that the country has entered “election mode”, which represents a risk for public accounts and the country's fiscal credibility. Brazilians eye October 2022 elections, but as elections become crucial in a polarized country, “everyone is making the point that the election has already started”. Policymakers have reportedly expressed concerns around the government's commitment to respecting the constitutionally mandated spending cap, particularly given the latest social programme in Brazil - “Auxilio Brasil”, and noted that uncertainty is already looming on economic forecasts for 2022. 


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