Daily Market Pulse

Yields find some calm and the U.K. annual budget

5 minute read


The U.S. dollar slid 0.2% on Tuesday, yet the greenback is still firm against a basket of major currencies. The dollar retreated as the U.S. bond market found some calm, with the 10-year treasury yield stabilizing around the 1.4% mark. Meanwhile, the Federal Reserve continues to overlook the higher yields in sharp contrast to other central banks. Today, the U.S. ADP employment report is probably the highlight, along with Services PMI surveys. Moreover, investors will also keep an eye on the U.K. Chancellor, Rishi Sunak, as he delivers the U.K. annual Budget. Yields remain in focus as well.


The common currency printed some gains (+0.2%) against the greenback on Tuesday after the upturn in eurozone inflation remains steady in February. Official data yesterday revealed that the headline inflation rate rose by 0.9% year-over-year, at the same pace as in January, which could suggest that the economy is running warm. On the pandemic front, German Chancellor Angela Merkel proposed a lockdown easing strategy accompanied by widespread Covid-19 testing, amid political pressure to open up the country. In stark contrast, Italy’s government has expanded restrictions as the country faces a surge in new cases, including an extension to travel restrictions between regions as well as to a nighttime curfew.


The Pound recovered some lost ground (+0.2%), but a stronger U.S dollar has capped further GBP’s gains, on Tuesday. On the one hand, Britain’s rapid vaccine rollout would underpin an economic rebound hence boosting the Pound. On the other hand, expectations of a faster U.S. economic recovery, as well as the Federal Reserve showing greater tolerance to higher bond yields have been boosting the greenback in recent days. Today, the U.K. Chancellor of the Exchequer presents the country's annual budget. This is likely to include some ideas around tax increases and spending cuts to recoup some of the huge payouts on pandemic support measures like furlough, which is set to be extended.


After five consecutive sessions registering losses, the Japanese yen managed to close 0.1% up against the greenback, thanks, in part, to a market correction. Earlier today, the service PMI index showed that business conditions in February were disrupted by the ongoing Covid-19 pandemic. Activity and incoming business experienced further contractions as restrictions introduced to curb the spread of the disease remained in place in Japan. This downbeat reading should put additional pressure on the JPY. In general, the JPY may continue to weaken if market sentiment remains generally optimistic and U.S. yields at high levels.


The Loonie, once again, printed gains (+0.15%) over its U.S. counterpart on Tuesday as higher U.S. bond yields faded and domestic data showed faster-than-expected economic growth. GDP growth smashed market expectations and the Bank of Canada’s forecasts. The Canadian economy grew 0.1 % over a month earlier in December, following an upwardly revised 0.8% expansion in the previous month and compared to market expectations of a 0.3 % gain. It is the eighth-consecutive month of expansion following the biggest contraction on record in March and April. Meanwhile, oil prices moved up after a three-day fall despite the OPEC+ alliance saying it is poised to agree on an output increase at its meeting this week.


The Mexican peso appreciated 0.15% against the U.S. dollar on Tuesday, consolidating gains from the day before amid a volatile trading session. The calm over the U.S. bond market was the major reason behind a stronger MXN. However, the Fitch Ratings’ announcement saying the credit rating agency will stop providing rating services to Petróleos Mexicanos (Pemex) as of this Thursday, raised concern over the controversial policies from the Mexican government. Looking ahead, developments in domestic impasses will continue to drive attention.


Yesterday, The Chinese yuan was almost unchanged (-0.08%) against the greenback as market sentiment recovered gradually from a top banking regulator's comments made a day earlier about risks of a bubble in the global financial markets and the nation’s property sector. Chinese markets seem stable ahead of the annual meeting of the National People’s Congress on Friday. The country will announce goals for 2021 as well as its next five-year plan for economic development. Earlier today, service PMI data showed the services sector remains in expansion, even though the PMI Index edged down from 52.0 in January to 51.5 in February, to indicate a mild increase in services activity across China.


The Brazilian real plunged 0.66% against the greenback on Tuesday, retracting almost 5% in just four trading sessions as the populist policies from President Jair Bolsonaro raised concerns about the sustainability of the fiscal account. President Jair Bolsonaro's decision to increase taxation in the financial sector, vehicles, and the chemical industry to offset the suspension of the tax on diesel fuel and domestic gas has caused discomfort to local and foreign investors. At the same time, the government proposal of a fresh emergency package also was a matter of concern for the markets. The proposal discusses a new round of direct payments for low-income people around BRL 35 billion and a freeze on public sector wages. Looking ahead, market participants will wait for GDP data in Q4 and Service PMI survey later today.


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