The U.S. dollar index, a coefficient used to benchmark the performance of the dollar against its main peers, recorded 0.22% gains amid global risk aversion due to a spike in coronavirus cases and sustained inflationary pressures, which increases the likelihood of hiking rates sooner than anticipated. The broader sour mood hit on the stock market, with the Dow Jones Industrial Average falling 900 points through the session while global indexes followed the same pattern. However, this performance wasn’t even across currencies pairs, with commodity-linked currencies being the worst performers against the greenback as risk drivers removed support and added to the demand for dollars. Today, the USD has a light economic calendar with Housing Starts and Building Permits being the main headlines for the day with expectations at 1.59 million and 1.7 million respectively.
The EUR remained virtually unchanged against the USD, recording a 0.04% retracement during yesterday’s trading session. Concerns around the Delta variant and rising U.S. inflation have added pressure to the common currency. In Europe, floods in specific areas and travel and activity restrictions weigh on the ongoing recovery and the expected summer season which was supposed to boost growth prospects across the old continent. However, as the U.S. is also experiencing a surge in coronavirus cases, the greenback benefits from inflows in times of trouble given its safe-haven appeal, specifically on the 10-year treasury yields. This week’s interest rate decision will be key for market participants to understand what the latest shift in the inflationary approach means, and what expectations are from the European central bank (ECB). Meanwhile, the ECBs bank lending survey is due today with the potential to induce refresh impetus in the market.
The British Pound fell 0.72% against the American dollar, hit by Brexit news suggesting that the U.K. will demand the E.U. to be more over the Northern Ireland Protocol. David Frost, Brexit’s Minister, is preparing a statement on the matter later on this week where the spokesman is looking to establish a treaty given the special situation in the Irish border, although the details on such a treaty remain unknown. Additionally, Covid cases continue to mount in the UK as daily infections registered 40k new cases on “freedom day”, which constituted the highly anticipated lifting of restrictions. However, thanks to the fact that 70% percent of U.K adults have received two shots of a vaccine, deaths remain low although hospitalizations are rapidly increasing.
The Japanese Yen closed 0.38% higher against the greenback amid a risk-averse mood in global markets and investors looking for refuge under the JPY safe-haven appeal. Renewed concerns over the rising number of Covid-19 cases promise the economic recovery weighing on sentiment, with major U.S. indices recording losses between 1% and 2.2%. Moreover, the 10-year treasury yields fell back 7%, making it challenging for the greenback to recover momentum against its risk-free counterparts, although commodities linked currencies fell considerably against the dollar. On the data front, the National Consumer Price Index posted 0.2% year over year, although market participants expected a 0.1% contraction. We continue to expect the market to digest the upbeat inflation data in Japan, but the currency seems to sustain momentum.
The Canadian dollar registered significant pressure from the US dollar, falling back 1.1% during yesterday's session amid a shift in risk sentiment, especially in the commodities-linked currencies. Additionally, crude oil prices plunged following the dismal mood and the latest announcement from OPEC agreeing to increase production output, coupled with slowing demand. The West Texas Intermediate (WTI) broke the USD 70 support, reaching USD 66.3 during yesterday's trading session and removing support from the loonie to sustain higher levels against the dollar.
The Mexican Peso fell 1.15% against the dollar following the dismal market mood amid the global increase in Coronavirus cases and inflation fears that underpin the likelihood of U.S. policymakers hiking rates sooner than expected. Despite the high volatility in yesterday’s move, the pair continues to trade within a horizontal channel, testing the MXN lower support at the moment. However, inflation reports for July are due on Thursday which may induce renewed impetus in the market.
The Chinese Yuan retraced 0.19% against the greenback amid a global risk-off sentiment induced by increasing cases of Delta variant alongside restrictions in the APAC region. Additionally, the People’s Bank of China decided to keep its benchmark loan rate unaffected, indicating stable monetary policy despite a recent surprise move to add liquidity to the financial system. The Loan rate sustained its 3.85% level, the same level since April 2020, with a report by the PBoC adding that the additional liquidity announced last week does not represent a change in policy. This. This failed to impress market participants and reduced the demand for Yuan.
The Brazilian Real led a broader sell-off in Emerging Market currencies amid risk-off sentiment induced by fears that the recent outburst of the virus will dampen global growth. Additionally, a correction in oil prices put additional pressure on commodity-reliant nations while risk premium on emerging-market sovereign debt widened over risk-free Treasury yields, approaching multi-month highs given the broader risk-averse sentiment in global markets. Additionally, corruption scandals continue to come to light with Health minister Eduardo Pazuello taking part in a meeting to negotiate the purchase of Chinese firm Sinovac’s vaccine at a price that tripled in cost from previous contracts.