Yesterday was another strong day for the safe-haven U.S. dollar. The dollar index notched a three-month high against a basket of major currencies as elevated U.S. Treasury yields got the foreign investors’ attention. Benchmark 10-year Treasury yields rose more than 5bps yesterday, touching 1.6% once again. Higher yields narrative may have further room to run ahead of consumer price inflation reading on Wednesday amid the U.S. President Joe Biden’s $1.9T package. According to Democratic lawmakers and aides, the stimulus package is poised to be approved in the House when it takes up the bill as soon as today.
The common currency fell another 0.53% against a stronger greenback on Monday. The Euro also took a hit following weak January Industrial Production numbers out of Germany and Spain. German Industrial production, including construction, fell by 2.5% month-to-month in January, dragged down by a 12.2% plunge in construction. While Spain's industrial production fell by 0.7% in January. Elsewhere, Russia's Sputnik V vaccine is coming to Europe as Brussels is under fire for its slow vaccination progress. Many European leaders, such as Prime Minister Mario Draghi have pledged to speed up vaccination campaigns amid a new rise in infections. Of the releases due, the final Q4 eurozone GDP will drive some attention, but unlikely to be a market mover.
It was not a busy day for the pound yesterday, with the GBP/USD pair trading in a narrow range of 50 pips. Remarks from Bank of England Governor Andrew Bailey did not bring any surprise, leading the GBP to fall 0.19%. Mr. Bailey reiterated that the BoE's QE program will continue until the end of 2021. Today, investors will digest the recent U.K. BRC Retail Sales data, which bounced back despite the continued closure of non-essential shops. Year-over-year growth in total sales values rose to 1.0% in February, from -1.3% in January. Furthermore, the data also suggest that overall consumer spending appears to have recovered.
Once more, the dollar demand was notable against the Japanese Yen, with the JPY hitting 9-month lows yesterday after benchmark 10-year U.S. Treasury yields rose more than 5bps, piercing through 1.6%. Earlier today, official data reported mixed data. Real GDP growth was revised down to 2.8% quarter-over-quarter in Q4, from 3.0% in the preliminary reading and below the consensus, 3.0%. In contrast, machine tool orders leaped 36.7% year-over-year in preliminary February data, up from 9.7% in January. The number suggests that trade and industry have been very resilient to the fresh virus restrictions across the globe. Looking ahead, investors and traders will digest the recent data, but the U.S. bond markets could exert pressure on the JPY.
The Loonie was almost unchanged (-0.06%) while the U.S. dollar outperformed among other G10 currencies on Monday. Pressure on the CAD was less than on some other major currencies because 10-year Canadian bond yields have been keeping pace (1.533%) with the recent move higher in U.S. yields (1.6%) and oil has climbed. There is no material data to be released today, thus investors will wait for the interest rate decision by the Bank of Canada on Wednesday. The central bank has pledged to keep interest rates at 0.25% until the economic outlook improves.
The Mexican peso tumbled 0.84% against the U.S. dollar after official data showed that Mexico Consumer Confidence Index was unchanged at 38.4 in February. Although Mexico was the first Latin American country to roll out a vaccine program for Covid-19, the pace for vaccination has slowed, hence, raising concern about the economic recovery. Today, INEGI (the statistics institute) will publish CPI inflation figures for February. It is expected headline inflation rose to 3.8% from 3.5% in January, where an upside pressure from energy prices is likely to be mitigated by a fall in non-core food prices.
The Chinese yuan erased all its gains against the greenback this year after the CNY dropped 0.45% on Monday. Much of that, unsurprisingly, due to the rise in the U.S. Treasury yield in the last couple of weeks, which has been hitting hard the emerging markets currencies. In general, surging U.S. yields suggest that foreign investors may have started to decrease their riskier asset exposure and repatriate capital back into dollars. Looking further ahead, investors may turn more cautious on the CNY outlook in the near term, even with better Chinese economic data.
In a surprise decision, Supreme Court judge, Edson Fachin, annulled the criminal convictions against former-President Lula. If the decision is upheld, former-President Lula would have his political rights restored, and therefore would be allowed to run for the presidential election of 2022. The market reacted negatively to the breaking news, leading the BRL to close 1.7% down on Monday. Meanwhile, the pandemic is stabilizing, gradually, in most of LatAm, but the situation in Brazil is daunting. Brazil's cases have risen rapidly in recent days, and deaths have overshot. The markets are still waiting for the emergency package bill, which will be discussed today in the Chamber.