Daily Market Pulse

Dollar gains amid global Delta variant concerns


The U.S. Dollar Index, which values the greenback against a basket of six major currencies, edged 0.06% higher amid upbeat market sentiment as fears of inflation make room for hopes that the Delta variant has a limited impact on vaccinated countries. Despite a surge in new Delta variant cases, investors find peace in the fact that there are relatively lower amounts of hospitalizations and deaths, in comparison to previous outbreaks showing that vaccines are helping control the situation. Market conditions remain docile at this stage as investors wait for new catalysts to trigger new moves on the market. Later today, the S&P/Case Shiller Composite House Price Index and the Conference Board’s Consumer Confidence will be released, providing good insights into the housing market pick up and consumer morale in the U.S. while Fed official Thomas Barkin is due to speak later today and may provide some insights on tapering bond purchases.


The EUR retraced marginally against the USD recording 0.06% losses during the quiet Monday trading session. The upbeat mood sustains amid investor caution in relation to the latest Delta variant breakout which seems to be leaving fewer hospitalizations and deaths thanks to an efficient and robust vaccination rollout program in Europe. Investors will eye the Consumer Confidence and Economic Sentiment Indicators for the euro area in order to measure European morale while cross-referencing with any signs of a pickup in the German Consumer Price Index featuring the most important headlines for today. Market participants will look for any elements that might add pressure to the European Central Bank (ECB) to change its stance before it was previously anticipated by policymakers. On the other hand, the latest CFTC report shows that speculators’ Net EUR longa reduced to the lowest in 90 days suggesting that it is unlikely for EURUSD to rebound significantly in the near term unless there is a change in the market conditions i.e. mood swings.


The Pound Sterling advanced 0.56% during the early trading hours of the day, erasing gains after the U.S. market opened amid a renewed dollar demand fed by 10- year U.S. Treasury yields edging higher, bolstering the demand for dollars and closing the day with mild 0.11% gains. The new U.K. Health Minister, Sajid Javid announced yesterday that the British economy will reopen on the 19th of July as the government doesn’t see any reason to go beyond that date. Despite the encouraging news, the U.K reported almost 23,000 new daily cases, the highest one-day increase in over five months amid the outbreak of the Delta variant. Skeptical market participants found it difficult to feed the pound after the reopening announcement. It is challenging to ignore the fact that such an increase in COVID-19 cases can jeopardize the reopening plans as we witnessed in the “June reopening”, postponed for the same reason. However, the vaccination ratios have proven themselves strong as hospitalizations and deaths have reduced significantly as the British population seems to be resisting any bigger impacts.


The Japanese Yen continues to register mild gains against the greenback, recording 0.06% appreciation after Japanese Retails sales exceeded expectations posting 8.2% year over year growth vs 7.9% previously anticipated. The positive data added to the prospects of recovery, but market participants understood that the Japanese build-up would be slower as the Unemployment rate posted 3% vs 2.9% expected; and coming from a previous reading of 2.8% in May, raising concerns over the job market. Market expectations have set the Japanese economy to grow 0.3% in the second quarter, following a 3.9% growth in the first quarter. 


The Canadian dollar fell 0.41% against the American dollar during yesterday’s trading session amid softer crude oil prices, removing some support from the Loonie and a pickup in USD demand following an increase in U.S. Treasury Yields. The West Texas Intermediate (WTI) suffered losses amid coronavirus cases' global resurgence, which raised concerns over the Crude Oil demand if economies would need to lock once again, dropping below USD 73 per barrel. Today, we don’t anticipate any relevant data release or eventful speech for the Canadian dollar and we expect the pair to be driven by U.S. drivers, mainly inflationary expectations.  


The Mexican Peso retraced 0.14% against the greenback amid the U.S. dollar strengthening around a spike in Treasury Yields and Banxico officials warning market participants that rate hikes might be overpriced as the USDMXN pair test key support levels. The comments from Banxico’s deputy governor come after last week's surprising interest rate hike, highlighting that the recent adjustment in monetary policy was NOT the start of a tightening cycle and that there is still room for economic recovery before transitioning to a contractionary policy. However, Banxico has been one of the "hawk" central banks with the adjusted monetary policy before the Fed.  As the U.S. policymakers stay put at this stage, they will continue to protect the carry advantage on MXN, suggesting that current market conditions could continue supporting further appreciation of the Mexican Peso.   


The Renminbi registered modest gains (0.06%) against the greenback following Monday's Peoples Bank of China quarterly meeting. The monetary policy committee released a statement on Monday announcing that it will step up its coordination with global economic policies and prevent “external shocks”. However, policymakers reiterated that China’s monetary policy approach will continue to be prudent and targeted, keeping liquidity reasonably ample. The Chinese economy registered record expansion figures in the first quarter, and recent growth indicators stabilize by converging towards more balanced figures. The PBoC has expressed its intention to allow market participants to freely value the Chinese Yuan, but controls and intervention are still important tools for Chinese policymakers. The PBoC will continue to keep its policy stance unchanged, taking a gradual approach to curbing credit growth and releasing enough liquidity in the market.    


The Brazilian Real appreciated 0.46% against the dollar and is looking to test new 1 year highs, amid expectations of the Brazilian Central Bank to hike rates further in the upcoming monetary policy meetings. The BCB has expressed in previous announcements that the monetary policy committee may accelerate the pace of monetary tightening toward a neutral interest rate as the economy picks up and amid increased inflationary pressures from consumer prices that suffer the effects of higher energy costs due to the underlying water crisis in the country. The prospects of higher interest rates will likely continue to support further appreciation of the BRL, as interest rates differentials and the advantage in yield help provide a competitive advantage with the Fed continuing to hold an unchanged monetary policy stance. 


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