The US Dollar Index, which benchmarks the performance of the greenback against a basket of major currencies, keeps testing a critical support level which could trigger a significant sell-off on the USD if broken. However, this support continues to hold the USD against its major peers, and in a quiet session yesterday, the Index closed 0.2% lower. Risk perception has been the main driver of the downward pressure on the greenback, and we expect this to continue throughout the day. The release of the Housing Price Index and Consumer Confidence later today may hint about the more significant U.S. Gross Domestic Product (GDP) figures that the market is expecting on Thursday. On another note, the Centers for Disease Control and Prevention announced that 49.6% of U.S. adult residents are fully vaccinated while 61.3% have received at least one dose. The report also showed that the country is recording some of the lowest COVID-19 metrics in almost a year and these are expected to keep improving.
The EUR registered a modest gain of 0.35% against the USD, in a Monday session weak in fundamental drivers. Today the market will focus on German Gross Domestic Product figures for Q1, where the investors are expecting a 3% yearly contraction. At the same time, the IFO monthly survey will give a sneak peek into Business climate and Consumer confidence. Overall the narrative continues supporting further appreciation of the EUR, which is pushing to break the highs registered in February this year.
Cable closed the first day of the week pretty flat (+0.04%) after dropping 0.3% during the European trading hours and recovering once the U.S. market opened. The governor of the Bank of England (BoE) Andrew Bailey testified before the Treasury Select Committee saying that the economy is responding well to the current level of stimulus and that he is content with the current policy setting. Despite the lack of drivers, U.K fundamentals remain strong, and technicals suggest risk on the upside for the British pound.
The Japanese had a shy session against the USD, replicating the low volatility of the U.S. treasury yields. The Governor of the Bank of Japan (BoJ) Kudora said that policy will continue to focus on price stability and that the BoJ will sustain the current levels of monetary easing. However, Governor Kudora also emphasized that the short-term priority will be to respond to the impact of COVID-19 on the Japanese economy. Today the economic calendar for Japan is empty.
The Loonie traded in a horizontal pattern, failing to consolidate any meaningful price action during the bank holiday session. The overall risk-on sentiment keeps putting pressure on the USD, and the market is testing key support levels at prices last seen in May 2015. The Canadian Dollar is still supported by solid fundamentals, an uptick in inflation, hawkish monetary policy adjustment in April, and a spike in commodity prices, in particular oil, metal, and agriculture products. We expect that the prospect of global economic recovery will continue to drive the Canadian appreciation, but monetary policy adjustments from the Fed are still the wild card that can revert this trend.
Yesterday, the Mexican Peso edged 0.34% higher against the greenback for the third trading session in a row. The MXN’s leap was mainly driven by the recent inflation reading which came in well above the Bank of Mexico’s target range during the first half of May, spurring bets of tighter monetary policy and helping the MXN to ignore the central bank’s uncertainty. Apart from inflation, surging oil prices also provided extra support to the currency. Crude oil (West Texas Intermediate) rose 3.79% to $66.05/barrel, propelled by the recent PMI numbers which showed that economic activity across developed markets would boost global energy demand this summer. Looking ahead, recent higher commodity prices might have helped Mexico to record an upbeat trade balance in April. The official data will be released later today. The current account in Q1 is also expected to draw attention.
The People’s Bank of China (PBoC) has committed to a more permissive monetary policy and exchange rate. For this, the Chinese central bank set its USD/CNY central rate -0.19% lower, allowing 2% movements in either direction. In the early trading hours of the day, the onshore yuan spiked to a three-year high against the USD following the weakening of the USD overnight and confirmation from Fed officials that policy would remain unchanged. However, despite the PBoC commitment to a more permissive onshore exchange rate, officials are aware of the risks of yuan appreciating further and how it could affect exports. Moreover, the central bank expects to offset inflation and the increasing cost of commodities with a stronger yuan.
The Brazilian real kicked off the week on the right foot, closing 0.8% up against the U.S. dollar and recovering from two-week lows. Yesterday, Brazil’s Central Bank (BCB) announced it will start a program of FX swap auctions that will eventually rollover the $12.2 billion worth of traditional swap contracts due to expire on Aug. 2. The operation is financially equivalent to a sale of U.S. dollars in the futures market in order to smooth the BRL rate depreciation trend. Meanwhile, there are renewed concerns about a third wave of the Covid-19 in Brazil due to the new Indian strain that was identified in the country. The Ministry of Health has announced restrictions at airports and major highways. Looking ahead, a busy economic calendar lies ahead today, highlighted by the mid-month IPCA-15 inflation and Consumer Confidence Survey.