Daily Market Pulse

Lagarde defies bond markets and Biden sets the next partisan clash


The U.S. currency held firm against a basket of major currencies after ending March with 2.4% monthly gain. Yesterday, U.S. President Joe Biden introduced his long-awaited $2 trillion plan, including $621 billion to rebuild infrastructure, $180 billion for research and development, and so on. However, the new plan also sets the stage for the next partisan clash in Congress as Republicans and business groups criticized the corporate tax proposals. Elsewhere, in a day that ECB President Christine Lagarde baited the bond markets, the benchmark 10-year Treasury yield held well against its new highs. Looking ahead, job claims are expected to drive attention while currency trading is expected to slow towards the Easter holidays in many parts of the world.


The Euro remained almost unchanged against the U.S. dollar on Wednesday, although the currency is still under pressure due to concerns that the eurozone’s economic recovery is being hampered by a surge in Covid-19 cases. French President Emmanuel Macron announced a new four-week national lockdown, closing schools and businesses as the country seeks to contain new cases. On the economic front, official data showed earlier today that retail sales in Germany rose by 1.2% year-over-year in February, but well below the consensus for a 2% increase. The prospects in the near-term are not bright either, as lockdowns will remain a drag on sales at the start of Q2. Elsewhere, market players will continue to react to the recent remarks by ECB President Lagarde, where she defied investors who have been pushing up borrowing costs on the euro zone’s bond markets to test the ECB’s resolve.


The first quarter ended with the Pound printing some gains over the greenback. The GBP rose 0.33% as, once more, vaccination progress was seen as an important economic fundamental as they offer the prospect of a sustained and lasting release from damaging lockdowns. On that note, two new Covid-19 vaccines are due to arrive in the U.K. boosting confidence in its vaccination rollout. The UK government aims to have the entire adult population vaccinated with at least one dose by the end of July. Looking ahead, market participants will have a chance to take a look at the final reading of the UK Manufacturing PMI report for March. 


The U.S. dollar had another notable gain against the low-yield Japanese yen on Wednesday. The JPY tumbled 0.33% as a result of the strong U.S. equity market performance and a further rise in Treasury Bonds. Domestically, official data did not help the currency either after government data showed industrial output fell 2.1% in February from the previous month due to a strong earthquake that struck northeastern Japan and disrupted parts supplies for major automakers, reducing their production. Today, investors will assess the recent manufacturing PMI, which rose from 51.4 in February to 52.7 in March, suggesting that the Japanese manufacturing sector continued to gather some positive momentum at the end of the first quarter of 2021.


The commodity-dependent Canadian dollar rose 0.5% against the greenback as official data showed that Canada’s economy expanded for a ninth consecutive month in January and most likely grew in February. However, further CAD’s gains were capped after future oil prices in New York tumbled 2.3% on Wednesday to the lowest level in nearly a week. The dismal near-term oil demand in Europe offset a surprise oil supply draw in the U.S., as well as signs that a wider vaccination roll-out would raise the oil consumption. Looking ahead, February’s building permit data is due out and may come very strong, reinforcing the construction trend, with Canada’s construction investment starting the year off with a new all-time high.


The Mexican peso rose 0.7%, extending gains against the greenback on Wednesday. The new government’s forecast for the Mexican economy gave some support to the MXN, with the new projections pointing that Mexico’s economy will grow at a rapid pace in 2021 and reach pre-pandemic levels in early 2022, after going through its most severe recession since the Great Depression of the 1930’s last year. Furthermore, the country's financial stability council ratified that the financial system continues to face the pandemic from a solid position as the country’s banking system has a solid capital position and liquidity levels above the minimum applicable regulations. Markets will be closed today due to the national holiday Maundy Thursday.


The Chinese yuan appreciated 0.3% against the U.S. dollar, recovering some lost ground as strong economic data helped the currency get some respite. The recent manufacturing PMI report showed that Chinese manufacturing companies signaled a further improvement in operating conditions in March. The index came at 50.6 in March from 50.9 in February. Although the rate of growth edged down to an 11-month low, it remains modest overall. Earlier today, in the Asian trading session, the CNY was under pressure as the new U.S. fiscal stimulus will keep the dollar moving up against emerging market currencies, including the CNY.


Yesterday, a strong correction was seen in the emerging market currencies, including the Brazilian Real. Although the country is living through a spiral of political and economic risk, the BRL jumped as much as 2.45% against the U.S. dollar. President Jair Bolsonaro’s decision to reshuffle the six ministries improves the government’s climate with the Legislative, but this may be temporary, subtle, and change quickly. On the economic front, the IBGE unemployment rate rose to 14.2% in the three months to January and the number of people officially out of work hit its highest since comparable records began in 2012. Moreover, Brazil's national debt rose to a new all-time high of 90% of GDP in February, as a rise in net borrowing and nominal interest payments in the month outpaced broader economic growth. Looking ahead, industrial production for February and Manufacturing PMI reports are due later today.


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