Daily Market Pulse

Diplomatic concerns on the radar

5 minute read


Federal Reserve Chair Jerome Powell played down the risks that economic growth would spur unwanted inflation. He ratified that the Fed expects that inflation will move up over the course of this year, but it will not be persistent. Reflecting this remark, the 10-year U.S. Treasury yield slid for a second day. However, the Dollar gained 0.73% as a fairly risk-averse sentiment prevailed on Tuesday. Today, Mr. Powell and Treasury Secretary Janet Yellen will testify again to the Senate Banking Committee. Meanwhile, investors will get Purchasing Managers Index data.


EU’s back and forth lockdowns sparked fresh concerns over the economic recovery’s pace across the bloc. Also, the surging tensions between China and Western countries rekindled diplomatic concerns and added additional pressure on the Euro. Against this backdrop, the single currency dropped almost 0.7% against the U.S. dollar on Tuesday. Looking ahead, European Union is only prepared to let the U.K. take a small portion of AstraZeneca’s output from the Netherlands, and is set to announce tougher rules on vaccine exports. Meanwhile, market participants will assess the Flash PMI numbers.


The Pound was not able to break a three-day sequence of losses and fell 0.78% against a stronger greenback on Tuesday. There are several reasons that may explain the recent GBP’s weakness. Firstly, the successful Brexit departure sentiment may have gone. Secondly, the dispute with the EU over AstraZeneca with the EU blocking exports threatens to derail a so-far successful U.K vaccine rollout. Finally, the lockdown measures put the economic recovery at a slow pace. Today, Flash PMIs from Eurozone and UK and February’s U.K inflation numbers may set the tone of the market.


Undoubtedly, it was a fairly risk-averse day, helping the safe-haven Japanese yuan to find demand. The JPY rose 0.2% against the greenback after renewed tensions between Western nations and China’s relationship, as well as the World Health Organization’s warning of truly worrying trends in infections as societies are opened up without vaccines being rolled out evenly. Looking ahead, investors and traders will digest the latest Flash PMI, which showed that activity at Japanese private sector businesses remained subdued at the end of the first quarter of 2021, as flash PMI data pointed to a sustained deterioration in business activity in March.


The WTI crude oil extended a decline over 6% yesterday amid renewed worries about mobility restrictions hitting oil demand in Europe, and also India, the largest consumer of U.S. crude in January. As a result, the commodity-linked Canadian dollar continued to weaken against the U.S. dollar, extending losses (-0.48%) and moving back from the three-year highs last week. Today, there is no relevant economic data to be released, therefore, market players will keep an eye on the Flash PMIs from the U.S., Eurozone, and the U.K., as well as listening, once again, to Congressional testimony from the U.S. Fed Chair Jerome Powell.


The back and forth of lockdowns in Europe spilled over into oil prices on Tuesday, leading the West Texas Intermediate to drop more than 6% to US$57.76/barrel. As a result, the oil-linked Mexican Peso edged 1.25% down against the greenback. On the economic front, higher electricity energy prices and growing policy and financial risks could put Mexico’s central bank in a difficult spot. The next policy meeting is scheduled for tomorrow, there is not a consensus. The central bank may cut the main rate by 25 basis points to 3.75%, or keep it held at 4% due to a favorable perspective for the Mexican economic recovery, which is backed by the effects from strong projected U.S. growth. In general, it will be a close call.


Undoubtedly, mounting tensions between the West and China have been weighing on the Chinese Yuan. The CNY dropped 0.14% against the greenback on Tuesday, extending losses for the fourth trading session in a row. According to media reports, only three months after it was agreed, progress to pass an EU-China deal giving European companies better access to Chinese markets has sharply reversed after tit-for-tat sanctions. European Union announced sanctions against China on Monday for human rights violations. Then, in response, China blacklisted five members of the European Parliament and its sub-committee on human rights. Looking ahead, the yuan will probably continue to reflect the impasse and weaken.


Unsurprisingly, the COPOM Meeting Minutes from last week brought a hawkish tone, with policymakers signalizing that they are ready to raise the interest rate (SELIC) by another 75 basis points in May in an attempt to bring inflation back. On the back of this, the Brazilian Real was able to limit losses against the U.S. dollar on Tuesday, closing 0.28% down. However, the negative sentiment prevailed after the FGV Consumer Confidence Survey in Brazil registered its third-largest monthly fall on record, hammered by a deadly second wave of the Covid-19 pandemic and near collapse of the public health system in several cities.


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