The U.S. Dollar continued to retrace against most of its peers during the early hours of the day and recovered by the end of the trading session, closing in green territory with mild gains. The U.S. Dollar Index, which tracks the performance of the greenback against a basket of six major currencies, recorded 0.05% gains by market close on Wednesday amid risk sentiment recovering and Markit PMI figures showing generally positive results. The U.S. Markit PMI readings revealed that while the manufacturing sector continues to outpace the recovery led by the service sector, all readings still show expansionary results missing higher expectations on the Service PMIs. Additionally, U.S. Secretary Janet Yellen warned congress about the risk of debt default and a potential new financial crisis which would weigh on the greenback. Meanwhile, Fed Officials Bowman and Bostic argued that the current inflationary pressures may take longer than anticipated to fade away and they estimate interest rates hikes in late 2022 with surging growth at 7% and inflation above the 2% mark, as opposed to Chairman Powell, who testified yesterday before congress a much more dovish stance. Later today, interesting data flows are expected starting with the Personal Consumption Expenditures release, the Fed’s favourite inflation gauge, followed by Durable Good Orders, None-Defense Capital good orders, Gross Domestic Product (GDP), and Bank Stress Test Info.
The EUR edged higher as risk sentiment continues to rebuild in the market, but hawkish interventions from Fed officials and strong markit PMI data in the Eurozone and the U.S. induced some uncertainty in the market as it waits for new catalysts. In the background, the European Council is due to meet over the next two days and will involve different heads of state and governments of member states which may produce a market-moving outcome as well as the Economic Bulletin which is due to be published by the European Central Bank (ECB) that could provide some volatility. Additionally, ECB’s Panetta and Schnable are due to speak which may help interpret the reports due today.
The British pound recorded its third consecutive session registering gains against the greenback closing 0.11% higher ahead of the expected Interest Rate decision from the Bank of England (BoE) due later today. Cable remains on the front foot amid policymaker's optimism and the uptick in inflation which has hinted to the market that the BoE might be in a position to hike interest rates ahead of the Fed. However, the virus spread and the Brexit deadlock have weighed on Sterling and continue to invite caution for market participants ahead of the BoE monetary policy meeting. Markit PMIs yesterday revealed that the pick up in the manufacturing sector is faster than in the services sector, but both readings continue to provide economic expansion and increase in output. For today, the BoE is expected to hold an unchanged monetary policy stance.
The Japanese Yen continued to edge lower (-0.33%) amid risk sentiment restoring in the financial markets, weighing on the safe-having currency as investor appetite made them look the other way. Overall, the Yen continues to be submissive on mixed economic data and a softer BoJ tone. Policymakers believe that massive stimulus would help the economy to recover, with domestic demand providing the tailwind as households spend their accumulated savings. Today, Governor Kudora is due to speak, and will address the current challenges the Japanese economy faces and provide an outlook from the BoJ perspective.
The Loonie closed virtually unchanged against the greenback (0.01%) after advancing 0.42% as risk sentiment recovered but disappointing Canadian data erased early gains. Retails Sales recorded a 5.7% contraction in the month of April vs the 5% contraction previously anticipated. The same indicator, excluding Autos, dropped 7.2% vs 5% expected revealing poor performance in Domestic Demand. At the same time, the commodity-driven currency missed any impulse from crude oil, as West Texas Intermediate (WTI) stepped back from highs recorded on Tuesday, closing 3 dollars lower, quoting USD 70 per barrel.
The Mexican peso appreciated 0.70% against the dollar sustaining the momentum derived from general global optimism and the improved ranking as a recipient of Foreign Direct Investment. However, Hugo Lopez-Gatell, deputy health minister of Mexico, responsible for the national pandemic response, flagged the recent rise in infections and warned of a possible change in frequency and a new wave of the virus. Last week, Mexico City once again closed the schools due to a surge in coronavirus cases, which it continues to spread could see the government taking further measures and a possible lockdown.
The Chinese Yuan remained unchanged against the greenback (0.02%) recording new week lows during the session. The PBoC fixed its daily midpoint weaker for eight consecutive sessions, as the dollar stalled after taking support from hawkish Fed officials flagging their concerns on inflation. The rapid strengthening of the Yuan that we witnessed during the first half of the year has prompted official warnings about one-sided bets on Yuan strength. The PBoC adjusted regulatory requirements for financial institutions to hold more FX reserves in order to control the appreciation of the currency. The combination of PBoC official's warnings and regulatory adjustments have helped the Yuan slow its bolstering momentum retracing 2% from its end of May highs.
The Brazilian Real had a shy performance recording new highs during the trading session but closed slightly lower (-0.18%) as momentum from the latest interest rate hike stalls. Jair Bolsonaro, President of Brazil, launched its 2021/2022 harvest plans which compromises USD 50.7 billion worth of credit lines for farmers to help boost the agricultural output. The harvest plan budget increased 6.3% from last year’s budget, looking to finance production, distribution, insurance, and regeneration of degraded areas aiming for small, medium, and large producers. Government officials stressed that Brazil is an agricultural powerhouse and a top exporter of commodities, noting that the harvest plan will help boost the country's competitiveness.