The U.S. Dollar Index, which values the greenback against a basket of six major currencies, remained virtually unchanged (+0.01%) amid the upbeat mood as equity markets rallied and 10-year treasury Yields spiked. The constructive market sentiment came after President Joe Biden announced that, alongside a bipartisan group of senators, they have agreed to an ambitious infrastructure spending plan which is now due to be approved by congress. The infrastructure plan intends to feature USD 579 billion in new spending and an overall budget of USD 1 trillion over five years and USD 1.2 trillion over eight years. The USD momentum we witnessed last week seems to be fading away as the dollar remains on the defensive amid mixed signals from Fed officials and weak economic data yesterday missing expectations on Durable Good Orders, Nondefense Capital Goods, and Initial Jobless Claims. Later today the Fed’s preferred inflation gauge, the Personal Consumer Expenditure Price Index (PCE Index), is due to be released and market participants expect this reading to back the Fed hawkish stance.
The common currency registered mild gains (+0.04%) against the greenback as risk-on sentiment gradually restores on the market backed by higher German bond yields. Moreover, German Business Climate, Current Assessment, and Expectations all posted readings better than previously anticipated, showing a pick-up in morale from the European giant. Additionally, market participants believe that the economy is recovering at a fast pace as they see Gross Domestic Product (GDP) expanding 1.3% in Q2 as logistical bottlenecks progressively resolve. Meanwhile, Christine Lagarde, President of the European Central Bank, addressed the “Digital Euro”, emphasizing that while under no circumstances will it replace the physical euro, it will be an easy, cheap, and risk-free complement, predicting that the final solution will combine various technologies.
The pound Sterling retraced 0.27% against the dollar after the Bank of England (BoE) surprised the market with a more “dovish” stance than expected. The Monetary Policy Committee (MPC) decided to leave monetary policy unchanged after policymakers voted 8-1, leaving Chief Economist Haldane as the only hawk in the room. On a side note, he will be leaving his post after 32 years on the job. Market participants built expectation around a hawkish BoE which could raise rates even before the Fed, but policymakers stuck to its transitory inflation narrative, pushing back against any early monetary policy tightening calls. However, the central bank revised up their growth and inflation projections, anticipating that Gross Domestic Product may hit 5.5%, flagging that inflation is likely to exceed 3% for a temporary period, well above the 2% target the “Old lady” established. On the Brexit front, renewed optimism underpins the pound as a compromise between the European Union (E.U.) and the United Kingdom (U.K.) over Northern Ireland (N.I.) sausage war was achieved during this week's round of negotiations.
The Japanese yen pushed back 0.07% against the greenback after three consecutive sessions of recording losses amid recovering optimism which has weighed on the Japanese currency due to its safe-haven appeal. Additionally, Japan continues to struggle with COVID-19 and a slower vaccination pace than its developed counterparts. Japan’s emperor, Naruhito, is said to be extremely worried and expressed his concerns over the public unease and potential widespread spread of the virus during the Olympic Games. A recent Kyodo poll showed about 86% of people in Japan are worried about the risk of a rebound in COVID-19 cases if the Olympics go ahead this summer.
The Canadian dollar fell 0.13% against the American dollar as disappointing Retail Sales readings continue to weigh on the Loonie while crude oil prices stall. The West Texas Intermediate (WTI) crude oil price ranged around USD 70 per barrel, offering support to limit losses but lacked the impetus to spark a rally. This week, the Candian dollar had little input in terms of macroeconomic data which has kept the pair performing around U.S. news and developments. Next week, the Loonie will have a busier economic calendar with interesting Gross Domestic Product (MoM) and International Merchandise Trade leading the headlines.
The Mexican Peso appreciated 1.53% against the dollar, recording its fourth consecutive session closing in green. The Peso rallied after the Banxico surprisingly raised rates to 4.25% in a split decision aiming to keep inflation in check as inflationary expectations spike. The adjustment in monetary policy comes after the inflation rate climbed above 6% in early June and policymakers confirmed that subsequent decisions will be data-driven and price behavior. The Mexican Peso has benefited from the rebuilding of the risk-on sentiment and the U.N. Foreign Direct Investment ranking, which positions the MXN as one of the most attractive alternatives to invest in the Latam Region.
The onshore Yuan rallied 0.12% against the greenback as upbeat mood recovers while quiet developments on the PBoC side, as it continues to signal to be comfortable with a weaker Yuan for now, which has kept pressure on other regional currencies. However, the PBoC has already started curbing credit growth to address debt risks by gradually deploying to avoid an adverse impact on the economy. Next week, we expect Non-manufacturing PMIS and National and NBS Manufacturing PMIs which are due to be released ahead of the Caixin Manufacturing estimates.
The Brazilian Real advanced 1.05% against the greenback consolidating new highs during yesterday's trading session. The Real continues to maintain its momentum following the latest interest rate hike by Brazil’s Central Bank (BCB) saying that it is likely to see another interest rate hike in the upcoming monetary policy meeting. Additionally, Brazil’s Confederação Nacional das industrial (CNI) released the latest survey on Industrial Production Index posting positive results at 52.8 in May, the best result since 2017. Moreover, employment in the sector also showed encouraging readings with 51.1 points after 11 months of negative performance due to the pandemic.