Daily Market Pulse

USD higher by nearly 2%


The USD remained strong overnight, especially against the EUR and the GBP, as the move in US equity markets benefitted the greenback. The Dow fell more than 600 points, while the NASDAQ fell more than 4%, officially entering “correction territory”. Dow Futures are slightly higher this morning, as are the S&P 500 and NASDAQ indicating the equity markets may move higher at the opening later this morning. The movement in equity markets has traders taking off risk in currency trading and moving the USD higher by nearly 2%, climbing from the 2-year lows it saw earlier in the month. Congressional leaders are reportedly hardening their stances, with Republicans suggesting a modest $500-700 million bill, which is lower than before. House Speaker Nancy Pelosi said the idea is "an insult to Americans' intelligence." The continued stalemate between the two sides to come up with a stimulus package is adding pressure on financial markets. US Treasury yields are lower this morning, as the fall in tech stocks, has investors moving into the safety of US bonds. The 10-year note is trading lower at 0.6722%, while the 30-bond is trading at 1.4077%. Pressure may remain on the equity markets and the USD may remain strong during trading today.


EUR/USD is trading lower this morning, having broken through strong support levels as rising COVID-19 cases in the old continent and uncertainty ahead of the ECB are weighing on the pair. From a technical perspective, the overnight sustained weakness below support levels has confirmed a near-term bearish outlook. The single currency is trading below the moving averages and the RSI level has been trading between 30 and 35, currently at 34. The move lower in EUR/USD was the sixth consecutive day of a negative move. The euro remains under pressure as investors await Thursday’s European Central Bank meeting with some concern. The EUR has fallen about 2% since posting 28-month highs on September 1, pushed lower by comments from ECB chief economist Philip Lane, who said the exchange rate mattered to monetary policy. Any hint of concern at the currency’s rise, or that low inflation will require an ultra-easy policy for a very long time, could push the euro lower again and boost the dollar. With the ECB meeting occurring tomorrow, the EUR could remain under pressure during trading today. 


GBP/USD is lower, trading at levels not seen since late July. Concerns about the collapse of Brexit talks, tighter coronavirus-related restrictions, and the halt of AstraZeneca's vaccine trial are all weighing on the pound. The RSI on the hourly charts is well below 30, at 19, indicating considerable oversold conditions. That means we could see a bounce, potentially before the next move down. GBP/USD is trading below the 50, 100, and 200 Simple Moving Averages and momentum remains to the downside. Prime Minister Boris Johnson's government is pushing through legislation that would violate the Withdrawal Agreement signed with the EU last year. It changes several aspects of dealings in Northern Ireland, including sensitive customs checks. The full details are due out later today, but markets are already reacting. Talks between London and Brussels have been stuck for months. The NI legislation is a setback reopening the previous agreement rather than moving forward to a new one. GBP is also suffering from rising coronavirus cases in the UK, which have prompted the government to limit gatherings to only six people. Nighttime curfews in specific places are also being considered. Adding to the pound’s woes, AstraZeneca has halted its COVID-19 vaccine trial after one patient fell ill. While such pauses are normal in such experiments, the setback, even if temporary, is weighing on the pound. The British pharmaceutical firm's project with the University of Oxford is considered one of the most advanced among nearly ten Phase 3 trials. Further developments about the patient's illness and its correlation with the immunization candidate are awaited. All of this may pressure the GBP throughout the trading day. 


USD/JPY is trading a bit lower this morning, as traders exit risk and move to safe-haven trades. The moving averages have all merged and the currency pair is trading between the narrow band of the 50 and 100-day moving averages. RSI has moved lower during overnight trading and is currently at 58. According to the Japanese Chief Secretary and front runner in the country’s leadership race Yoshihide Suga, “a strong economy is necessary to pursue fiscal reform." He also stated that he has no intention of changing the currency administration’s stance on economic growth. Given the pandemic impact, Suga said it is “important now to protect jobs and help companies continue to transact business”. These comments were made via Reuters and also included remarks about expanding COVID-19 testing capacity. Suga is a staunch supporter of Abenomics and there should be no change in policy if he is chosen the next PM. With investors continuing safe-haven purchases USD/JPY could ease lower during the North American trading session.


USD/CAD is much higher this morning ahead of the Bank of Canada meeting later today. Analysts expect the Bank of Canada to leave its policy rate unchanged at 0.25%. This decision will only be accompanied by a statement with the next Monetary Policy Report due at next month’s meeting on October 28th but Governor Tiff Macklem will release an economic report on Thursday. The statement is likely to maintain a cautious tone. He has recently indicated that the bank would not increase rates until 2023. An overnight slump in oil prices has helped to drag the loonie lower, as USD/CAD is trading at a three-week high. Technically, the currency pair is trading well above the moving averages. There has been some good two-way trading over the last few hours as USD/CAD eased off highs, the saw RSI reach the 80-level, well above the overbought 70-level. RSI is currently at 62. Oil prices are lower this morning as traders remain concerned about the effect of the coronavirus on demand. Brent crude futures were down $0.25 at $39.53 per barrel, after falling more than 5% on Tuesday and falling below $40 per barrel for the first time since June. U.S. West Texas Intermediate crude was trading at $36.48 per barrel, down $0.28, after having fallen 8% in yesterday’s trading session. As more countries are showing a rebound in COVID-19 cases, this has dampened hopes of a recovery in global demand. Cases have risen in India, Great Britain, and Spain, as well as in parts of the US. The pressure on oil will not bode well for the Canadian Dollar and USD/CAD could continue its move higher today. 


Mexico faces an onerous balancing act in its 2021 budget, reviving an economy severely battered by the coronavirus pandemic while sticking to the austerity promises of President Andres Manuel Lopez Obrador. When finance ministry officials present a draft budget to the lower house of Congress later this week, investors in both Mexico and the debt of its ailing state oil company Petroleos Mexicanos will scrutinize spending priorities. Lopez Obrador is an outlier among both wealthy and emerging nations, insisting on tight spending limits even in the face of the economic destruction wrought by the coronavirus lockdown. The economy he promised to revive is in the deepest slump since the 1930s Great Depression. Mexico’s central bank recently warned it could contract by 13% this year. Erasmo Gonzalez, who chairs the lower house budget committee, told Reuters there would be a primary deficit in 2021, without going into detail. Budget guidelines released earlier this year projected a primary deficit of 0.6% of GDP. Mexico was already in a mild recession before the pandemic. In the central bank’s most optimistic scenario, Latin America’s second-largest economy will be smaller at the end of next year than before the pandemic roiled the Americas. It might only make a full recovery in 2022. 


China released August CPI data overnight and they came out as expected with August CPI showing a continuing modest inflationary pressure, 2.4% for the year vs the 2.4% expected, and 2.7% prior. Tensions between the US and China remain high, as according to Reuters, a spokesman from the US Customs and Border Protection (CBP) confirmed early Wednesday, that officials are ready with orders to suspend imports of cotton and tomato products from western China's Xinjiang province over accusations about forced labor. In a draft announcement seen by Reuters, the CBP said it identified forced-labor indicators involving the cotton, textile, and tomato supply chains "including debt bondage, unfree movement, isolation, intimidation and threats, withholding of wages, and abusive working and living conditions.” At the moment, this news item seems to be having little impact on the markets, but further comments could put it front and center.


Brazil aims to launch a central bank digital currency (CBDC) by 2022, the president of the Central Bank of Brazil has revealed. The CBDC will be part of Brazil’s plan to digitize its payment system, including launching an instant payments system and a competitive Open Banking System. For Brazil to launch the CBDC, it needs to build a foundation based on an open and instant payment system. In order to have a digital currency, you need an instant payment system that is efficient and interoperable; an open system, where you can create competition; and a currency that has credibility, is convertible and international. The Brazilian central bank has already kick-started its payments digitization process. One of its initiatives is PIX, an instant payments system that the bank will launch in November. PIX will allow all digital wallets that use QR codes to be interoperable, allowing seamless real-time payments. The system will eliminate all the intermediaries such as the card issuers, acquirers, and issuers. The Brazilian central bank formed an intergovernmental study group to investigate the implications of a CBDC on the Brazilian economy. The 12-member group was charged with conducting a worldwide study on CBDCs, including the benefits to the economy, the potential risks, regulatory framework, and more. The Brazilian economy is still largely cash-centric, with 70% of the 209 million Brazilians choosing cash as their main payment method. However, with the advancements in financial technology and the spread of the coronavirus, digital payments are rapidly gaining a larger market share.


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