Daily Market Pulse

Yields retreat amid risk-off demand for treasuries

6 minute read


The U.S. dollar index, a common tool used to benchmark the performance of the greenback against a basket of six major currencies, edged 0.1% higher after the Fed’s Beige Book signaled a downshift in the economy due to the rapid spread of the Delta variant threatening to derail the economic recovery. Moreover, comments from the Dallas hawk, Fed’s Chief Robert Kaplan, added to the dollar strength, as he called for tapering as early as October. Despite the hawkish comments, Treasury yields remained soft amid the risk-off mood bolstered the demand for bonds. Equity markets stepped back globally as investors remain cautious ahead of Joe Biden's announcement of its six-pronged strategy aimed at fighting the spread of the Delta variant and increasing vaccinations. Coming up, market participants will remain tuned to Jobless claims reports from the U.S. and speeches from Fed officials Bowman and Williams. 


The common currency extended losses against the dollar during yesterday's trading session, closing 0.23% lower amid a broader risk-off mood following looming highlights from the Fed’s Beige Book and tapering expectations from European policymakers. The fast spread of the Delta variant keeps the U.S. economy in check, eroding the market sentiment, and bolstering the demand for risk-free treasures easing down yields. However, tapering expectations from the ECB induced a cautious optimism among Euro bulls following the latest comments from European policymakers. President Weidmann and Vasile eased the push to cap the Pandemic Emergency Purchase Programme, while Robert Holzmann backed quicker tapering amid the decade-high inflation and economic forecast. The ECB hawks are keen to action tapering measures, although they remain challenged by Covid fears and economic slowdown jitters. However, the common currency shows signs of optimism ahead of the monetary policy decision due later today.  


The British Pound edged lower against the dollar, amid yesterday’s risk aversion recording two-week lows for Sterling. However, the Pound Sterling now attempts a bounceback amid U.S. treasury yields edging lower, weighing on the demand for dollars. Nevertheless, expectations for an imminent tapering announcement in 2021 will continue to act as a tailwind for the USD and cap the upside of cable. Additionally, Covid cases in the U.K continue to add pressure to the pair, as British authorities released 39k daily new cases, while daily deaths reached 191 in their latest report. Datawise, market participants await for Friday’s economic activity indicators for the U.K. with Monthly Gross Domestic Product reading for July, alongside Industrial and Manufacturing Production.   


The Japanese Yen reversed momentum amid upbeat growth figures and diminished demand for the dollar as treasury yields retrace. Fears induced by the Fed’s Beige Book flagging a downshift in the economy kept market participants cautious, and they looked for refuge in Treasury yields erasing recent gains from tapering expectations. Moreover, 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 for the Japanese Yen. Moreover, the latest foreign investment indicators showed a significant increase in growth coming to the stock and bond markets. Foreign investments in Japan’s stocks spiked from JPY 24.1 billion to JPY 421 billion, while Foreign Bond investments grew significantly, from a contraction of 546 billion last week to an increase of JPY 1043 billion reported yesterday.  


The Loonie extended 0.95% losses against the greenback, following the Bank of Canada’s monetary policy meeting, and managed to close the session 0.45% lower amid the dovish hold from policymakers. Market participants anticipated the actual decision although hawks were disappointed by the soft tone of the central bank. The Bank of Canada held its interest rate unchanged at 0.25% and sustained its bond purchase program of CAD 2 billion a week. The spokesman mentioned that global economic recovery continued through Q2, mainly driven by robust U.S. growth and that this momentum will continue into the third quarter. However, the rapid spread of the virus and supply chain disruptions affected activities in several sectors, threatening to slow down the economic recovery. Moreover, the recent disappointing growth figures where the economy contracted 1.9% YoY instead of growing 2.5% were attributed to exports.   


The Mexican Peso remained relatively unchanged during yesterday's trading session, and it currently shows signs of recovery amid Treasury yields edging lower, courtesy of the risk-off mood. Uncertainty surrounding global markets and inflation reports due later today keep investors cautious amid market participants' rising concern around price actions. The consumer Price index is expected to post 0.2% monthly in August and 5.59% on a yearly basis, and it is expecting a mild decline from previous figures posted at 0.59% monthly and 5.81% annualized. Banxico has already raised rates this year, and further inflationary pressure may urge policymakers to contract monetary policy by pushing rate hikes. 


The Chinese Yuan regains momentum amid treasury yields edging lower, diminishing the appeal for U.S. dollars and mixed inflationary data from the Chinese economy. The Consumer Price Index readings missed expectations by 0.2%, releasing a 0.8% annualized, while Producer estimates outperformed market consensus by 0.5%, with a solid 9.5% on a yearly basis. Following the mixed data in China, investors remain uncertain and the dollar is expected to be the main driver behind the pair's movements in the short term. Moreover, China’s long-awaited plan to allow investment for Private Wealth between Hong Kong and its increasingly affluent southern region is set to kick off in the next few days. 


The Brazilian Real depreciated 2.6% against the greenback during yesterday’s trading session, following independence day in the country in the middle of protests both pro and against President Bolsonaro and his remarks during the demonstrations. Concerns arose from a few Bolsonaro supporters that threatened to take over institutional buildings ahead of the protest, although no incidents were reported during the course of the day. President Bolsonaro said during his speech that he will no longer accept that people like Alexandre de Moraes, Magistrate at the Supreme Court, continue to lash out at Brazilian democracy and disrespect its constitution. Moreover, Roberto Campos Neto, Brazil's Central Bank President, is scheduled to speak later today. Looking ahead, fresh consumer prices numbers, as measured by the IPCA index, will be released later today by National statistics agency IBGE. Another volatile trading session is expected.


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