Daily Market Pulse

Rising commodity prices and Treasury bonds

5 minute read


The greenback tumbled 0.31% against major currencies on Monday as market players focused on whether Covid-19 inoculation, economic growth expectations, and higher inflation could push bond yields higher. The USD also took a hit from rising commodity prices. The Bloomberg Commodity Spot Index hit the highest level since March 2013, with investor appetite booming for everything from metals to soft commodities.  Much of that is owing to worries about inflation, with investors scooping up commodity indexes, oil, and energy equities, to participate in the hot economy. Moreover, all eyes are on how U.S. Federal Reserve chief Jerome Powell might respond to resurgent inflation expectations in its two-day testimony.


The single currency printed solid gains (0.31%) against a weaker greenback on Monday, as the eurozone sovereign yields continued to move higher, pushing up the EUR. On that note, European Central Bank President Christine Lagarde said her institution is “closely monitoring” the market for government bonds, in a sign that she might act to prevent rising yields undermining the economic recovery from the pandemic. The EUR also received support from a solid Germany’s IFO, in which the aggregate business climate jumped to 92.5 in February, from a revised 90.3 in January, reversing a run of declines since October, when new virus restrictions were first imposed. Today, the eurozone final CPI data is due.


The Pound also made gains (0.38%) against the U.S dollar for the third trading session in a row, on Monday. Sterling is outperforming its G10 peers this year, appreciating about 2.5% against the dollar and around 1.7% against the euro. Despite having the most advanced vaccination program of any country with a population of over 10 million, U.K. Prime Minister Boris Johnson unveiled a plan called “England-Roadmap for lifting lockdown”, which aims to ease lockdown rules in a series of stages over the next four months. The plan received criticism for being far too slow. A rather busy day awaits, with all eyes on UK labor market figures and the CBI Trades Survey.


The Japanese yen printed sharp gains (0.32%) against the greenback amid a volatile trading session on Monday. The market is still paying attention to the U.S Treasury prices, as the 10-year note has a high correlation with the JPY. Japanese markets are closed for a national holiday “Emperor's Birthday”, therefore low volume and light liquidity could be expected today.


The Loonies pushed slightly higher yesterday in tandem with a rise in future oil prices. U.S. crude oil futures closed 3.08% higher at $61.49 a barrel, driven by the expected slow return of U.S. crude output after last week's deep freeze in Texas shut production. The Canadian government bond yields also rose, which helped the CAD to find a bid. Looking ahead, Bank of Canada Governor Tiff Macklem is due to speak later today on the impact of the Covid-19 pandemic on the labor market. The topic suggests he will emphasize how the recovery is expected to continue to be uneven and many are being left behind.


The Mexican peso started the week on the back foot, dropping more than 1.4% against the greenback as the rising global yields reduce the Mexican bonds’ attractiveness. Yesterday, the U.S Treasury yield rose 4 bps to 1.369%, while Mexico's 10-year dollar bond yield slipped 49 bps to 2.20%. Elsewhere, in the past week, the energy disruption emanating from Texas forced manufacturers in Mexico to pause their activities. The disruption may be severe enough to spur economists to reduce Q1 activity growth forecasts.


The Chinese yuan closed in the red (-0.12%) against the USD on Monday, as People’s Bank of China (PBoC) stated expectations by leaving interest rates on hold, with the one-year loan prime rate staying at 3.85%. The five-year loan prime rate was also on hold, at 4.65%. With China curbing the spread of Covid-19 faster than any country, their road to recovery has been brighter. Nevertheless, PBoC will not “prematurely” exit from its supportive monetary policies, as the central bank will keep a delicate balance between supporting the economic recovery, at the same time, preventing risk. 


The Brazilian real was battered down substantially by 1.54% against the U.S dollar on Monday after the Brazilian government removed oil state-owned Petrobras CEO Roberto Castello Branco and nominated Joaquim Silva e Luna – a general who had been serving as Itaipu’s CEO – in his place. Brazil's benchmark Bovespa index also tanked as Petrobras’ stocks plummeted 21%. On that note, investors are concerned about the fuel pricing policy in the short term and how the management change will impact the sale of the refineries, which had been advancing significantly. Still, this change could be a communication strategy to the extent to which it represents a pivot away from the reform agenda.


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