Daily Market Pulse

Greenback bounces as U.S. treasuries hit 2 month tops

6 minute read


The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, bounced back 0.37% after snapping 7 consecutive days of recording losses amid a risk-on environment and tapering expectations. However, Covid-19 woes shut down the party for optimistic participants, as piling cases in the U.S. tops 40 million since the start of the pandemic and more than 4 million of those cases were reported in the last four weeks. Amid the recent spike of Covid cases, President Joe Biden will present a six-pronged strategy this Thursday, which will be aimed at fighting the spread of the Delta variant and increasing Covid vaccinations. The White House plans to roll out Pfizer booster shots by September 20th, while Moderna might take a bit longer and J&J shots are still being researched. Pressure seems to be mounting over House Republicans to vote against the bipartisan infrastructure package which is due when they return to Washington later this month, inducing uncertainty and keeping investors cautious. The U.S. Treasury yields continue to underpin the greenback, sustaining a 1.34% level close to its 2 months high, in addition to the lackluster mood. Coming up, the Fed’s Williams is due to speak later today followed by the release of the Fed’s Beige Book which could renew market impetus. 


The EUR retraced 0.23% against the greenback, recording its second session in red, amid investor caution ahead of European Central Bank (ECB) monetary policy meeting and Covid woes keeping morale in check. Rising Covid cases in the U.S. and stimulus jitters from house republicans weigh on the market sentiment, adding support to the demand for dollars. Despite the broader market mood, European growth data exceeded expectations, posting 14.3% annualized vs 13.6%, while morale indicator Zew Survey - Economic Sentiment failed to impress significantly, releasing 31.1 while investors anticipated 52.2. European investors remain divided over the ECB tapering decision due to mixed data in previous weeks. The upbeat Eurozone Q2 Gross Domestic Product contrasts with the ZEW sentiment data and joins the mixed tone of European policymakers ahead of the upcoming monetary policy statement. 


Cable fell 0.30% during yesterday's trading session, as the pair remains on the defensive amid higher U.S. treasury yields and U.K. government policies dampening the Brit’s moods. The British Pound remained subdued amid a stronger greenback, underpinned by treasury yields edging to 1.38% during yesterday's trading session. Moreover, BoJo’s new tax hike keeps undermining the demand for Sterling as economists warned that the policy could hamper the economic recovery and relative performance of the cable. On the Brexit front, Brussels warned London there will be no renegotiations as the U.K. postponed, once again, the implementation of border checks on goods traveling to Northern Ireland. 


The Japanese Yen remained subdued to the greenback following the recent recovery in U.S. treasury Yields bolstering the demand for dollars and remaining supportive. However, Japanese fundamentals and expectations remain compromised following the recent resignation of Japan’s Prime Minister after failing to contain the spread of the Delta variant in the country and lacking to efficiently roll out its vaccination programme. As Covid woes added pressure in the U.S., it reduced the appetite for riskier assets, evident from a softer tone around global equity markets. However, Gross Domestic Product figures released during the early hours of today’s session posted upbeat results despite compromised fundamentals. Growth figures for Q2 recorded 1,.9% annualized vs 1.6% previously anticipated while its Trade Balance improved its surplus over the course of July, inducing momentum over the Japanese Yen.  


The Canadian Dollar remained on the back foot against the greenback during yesterday’s trading session as U.S. treasury yields and risk-off sentiment, due to Covid, weighed on Commodity-linked currencies. Crude oil prices slid almost 1% on the back of Saudi Arabia’s ARAMCO slashing prices for Asian customers, with West Texas Intermediate trading around USD 68 per barrel. The lack of market-moving news on the Canadian docket, combined with higher treasury yields and lower crude oil prices, keeps market participants cautious ahead of the upcoming Bank of Canada’s monetary policy meeting due later today. Market consensus suggests that the BOC will hold its interest rate at 0.25% and its bond purchase facility at CAD 2 billion per week, following disappointing growth figures. 


The Mexican Peso extended losses amid a stronger dollar and an eroded market risk sentiment. Moreover, investment figures in Mexico keep investors sour. The gross fixed capital formation in construction and machinery dipped 1.8% in the month of June, while annualized figures posted 17.1% growth in investment, driven by a 24.5% expansion in machinery and equipment, and an 11.5% increase in construction investment. Overall, investment grew 11.5% in the first half of 2021, compared with the same period last year, which was severely impacted by the Coronavirus pandemic.    


The Chinese Yuan fell back 0.17% amid the greenback’s strength, sustained treasury yields, and worsening Covid conditions in the U.S. dampening the market morale. However, China's sovereign bonds climbed to the highest in over a week after comments from PBoC officials dampened hope for another cut in the reserve requirements. Market participants did not write off the likelihood of policymakers adding stimulus, but lowered the probability of a targeted RRR cut in September - October to 50% from 70% previously, as the policymakers could use alternative low-profile and more targeted tools. 


The Brazilian market remained closed during yesterday’s trading session amid independence day celebrations in the country, which ended up flooding the streets with protests around the country as rallies pro and against Bolsonaro arised. Bolsonaro, whose popularity has significant room for improvement, is seeking to flex his political muscle in the face of a flagging economy, searing unemployment and inflation, and a series of investigations targeting him and his cabinet for corruption. Hardline supporters urged for a military intervention to give Bolsonaro unfettered power, and there are fears that protests could turn violent, echoing the U.S. capitol incident of former President Trump - to whom Bolsonaro is often compared. 


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