The greenback traded broadly weaker in a very quiet Tuesday trading session. The U.S. Dollar Index, which tracks the performance of the USD against a basket of major peers, fell 0.2% below three-month lows but failed to consolidate beyond those levels. Federal Reserve Vice Chairman Richard Clarida referred to the spike in April’s inflation of 4.2% as an “unpleasant surprise” and that he agrees to discuss tapering in the upcoming meetings depending on data flows. Moreover, Fed official Quarles talked down inflation fears saying that the current price behavior is most likely to be transitory, hinting that current monetary policy will remain unchanged in the short-term. The dovish Fed expectations pushed U.S. treasury yields to its two-week lows. We expect another quiet session today with comments from the Fed’s Vice Chair for Supervision.
The EUR closed 0.33% higher against the USD crossing the three-month highs which are setting the current resistance level. The common currency rallied during the European trading hours, but disappointing German Gross Domestic Product (GDP) erased early gains once the U.S. market opened. On the other hand, the German IFO survey Current Assessment, Business Climate and Expectation exceeded the market consensus adding to the appreciation of the EUR. Today we expect equivalent figures for the European Union which could hold the EUR above the three-month high resistance.
Cable had another flat session (-0.05%) with a rally during early trading hours which retraced sharply on a sell-off driven by the North American market. However, the Sterling outlook remains positive as the U.K. progresses its reopening as planned, supported by strong employment figures and an uptick in domestic demand. Despite the strong fundamentals, the British Pound has failed to consolidate further gains amid the broader weakness of the USD. Brexit has worked against the pound as frictions around the Northern Ireland protocol don’t seem to ease. Additionally, the U.K has recently witnessed an increase in COVID-19 cases which have pulled back the bulls, since a new spread of the virus would compromise the reopening plans.
The Japanese Yen remained unchanged against the greenback due to a lack of fundamental drivers and uncertainty around the direction of the Japanese currency. Due to the ongoing fourth wave of COVID-19 in Japan, the U.S. Government has advised its citizens not to travel to Japan even if they have already received two jabs of the vaccine. The news came as a surprise two months ahead of the Olympics which are set to take place in Tokyo. However, the U.S. hasn’t removed its support for the Games and Japanese officials said that they do not expect the US travel advisory to affect the Olympics. The Japanese Government is considering extending its COVID-19 state of emergency and launched its first mass vaccination centers in an effort to counter the spread of the virus and speed up the inoculation program of the country, in the interest of the games.
High oil prices and a weaker USD continue to overweigh the appreciation of the Loonie. Yesterday, the Canadian Dollar held the three-year highs against the USD firm in a session that was light in terms of data flow. The Bank of Canada (BoC) has expressed its concerns regarding a lag against their neighbors and different officials have their eyes set on any adverse results in the Canadian Exports. However, the pipeline capacity to export crude to the U.S. is scheduled to increase, boosting the trade of oil up to 420,000 barrels per day by the end of this year. This should help support the current fundamentals to continue holding current levels and potentially continue its appreciation. Later today we expect Lane's Speech.
An upbeat domestic data tried to help the Mexican Peso on Tuesday, but remarks from rating agency Fitch dented sentiment. Local data showed that Mexican exports grew by 74.2% year-over-year last month, while imports by 47.3%, both higher than before the pandemic started. On the other hand, Fitch said it expects the post-pandemic recovery to lag against its peers given the deep economic contractions and muted recovery prospects. As a result, the Peso slightly dropped 0.12% against the U.S dollar. Looking ahead, economic activity figures for March and finalized Q1 GDP, are expected to be important market movers.
The People’s Bank of China (PBoC) raised the onshore Yuan reference rate by 0.3%, the highest since Summer 2018. The Chinese currency opened today’s session with renewed momentum and it seems to be consolidating beyond these levels. The overnight activity showed that Asian equity markets edged higher while inflation concerns eased due to a modest step back of commodity prices. On another note, China has overtaken Germany as the biggest single import market for the U.K.as Brexit disrupted trade with Europe, and the Pandemic boosted demand for Chinese goods.
Soured winds from commodity markets contributed to add pressure on the Brazilian real on Tuesday. Commodity prices started to retract and the latest CFTC ( Commodity Futures Trading Commission) report showed that non-commercial traders cut several positions last week across soft commodities. As Brazil is a large exporter, lower commodity prices have a direct impact on the trade balance. In contrast, also yesterday, the mid-month consumer inflation for May rose above 7%, suggesting the central bank will deliver on its pledge to raise interest rates by another 75 basis points next month to 4.25%. Against this backdrop, the BRL ended 0.22% lower against the greenback. Today, traders and investors are looking forward to the latest April’s current account, which might come in rather strong, given the recent rise in commodity prices, the devalued BRL, and the increase in global trade.