Daily Market Pulse

The Fed open to joining central bank crypto race but warns caution


With the U.S. and U.K markets closed, the USD had no clear direction showing a mixed performance against its peers in a quiet and illiquid trading session. The U.S. Dollar Index, which tracks the performance of the greenback against a basket of major currencies, closed 0.28% lower as the bearish view on the dollar seemed to prevail among market participants. Concerns of high inflation seem to be fading away within the narrative of strong economic performance bolstering optimism in the global markets. Moreover, Federal Reserve Governor Lael Brainard talked about the benefits of having a cryptocurrency backed by the central bank, especially in moments of crisis like the pandemic, as it would simplify the delivery of stimulus and the financial access it can provide to the unbanked. Additionally, she stressed the importance of moving forward carefully as the Fed remains committed to ensuring that the public has access to safe, reliable and secure means of payment. Jerome Powell announced earlier this month that the Fed will release a whitepaper this summer that explores a central bank digital currency. Later today, we expect ISM manufacturing PMI for May which might bring some refreshed volatility to the greenback while the market patiently waits for Non-Farm Payrolls on Friday.    


The EUR advanced 0.32% against the USD as investors look for attractive assets in European markets while confidence in the Eurozone recovers. However, it has been noted by analysts that the USD is not reacting positively to robust U.S. data as the Commodities Futures Trading Commission (CFTC) positioning report shows that the market continued to add net long positions on the EUR for the 6th week in a row. Later today we expect preliminary EU Consumer Price Index (CPI) figures for May and Unemployment figures for April.  


Sterling had a positive start to the week despite the U.K spring bank holiday recording 0.4% gains against the USD, and is currently testing the three month high levels registered in late February. Cable closed the month building momentum and there is risk of a breakout on the upside as we are expecting Markit manufacturing PMI release and the Bank of England (BoE) Governor Bailey’s speech later today. The pair has been pulled back mainly due to the latest spike in coronavirus cases which may compromise Boris Johnson’s reopening plans. However, market participants seem to be positioning away from the greenback suggesting that the risk-on sentiments continue driving the markets.  


The Japanese Yen had a quiet session recovering some ground (+0.09%) from losses generated on previous days. Fundamentals remain complicated in Japan with a surge in coronavirus cases and a reduction in economic outlook. However, yesterday the Bank of Japan (BoJ) announced that for the first time since Governor Kudora assumed charge, there will be no purchases of Exchange-traded funds (ETF) for a whole month. The news came as a surprise as the intention of these purchases is to prevent stock instability and the Japanese outlook seems to add several risks for the central bank to remove further support. On the other hand, Nikkei 225 stock Average, the leading and most respected index of Japanese stocks, recently reached historical highs at levels last seen in April 1991 which might be an indicator for the BoJ to start tapering their ETF purchasing program.


Fundamentals keep supporting the bullish sentiment on the Loonie, which keeps trading at levels last seen in Q2-2015. Oil prices have edged higher ahead of the OPEC meeting scheduled for today which has helped the Loonie add further pressure to a weakened USD which seems to be indifferent to strong U.S. data. Yesterday,  Statistics Canada released the Current Account balance for Q1 recording a CAD 1.18 Billion surplus, below its expected CAD 3.4 Billion. Despite the negative data, the Loonie  didn’t seem to be affected as the market awaits Gross Domestic Product which is due to be released later today.  


The Mexican Peso continued to trade within a very tight range retracing 0.3% against the USD. The USDMXN remains very close to the year to date lows amid general weakness on the greenback. However, President Andres Manual Lopez Obrador is looking to replace the governor of the Central Bank of Mexico (Banxico) with an economist that not only focuses on keeping inflation in check, but someone who would prioritize economic growth and sustained development of the country. The comments from the President come after friction between the central bank and the executive government but many market participants believe that current policy has taken this into consideration, otherwise interest rates would have been adjusted by now. Furthermore, it's worth mentioning that the actual mandate of Banxico is to control inflationary pressure and ensure financial stability in the country.


Yesterday, the People’s Bank of China increased its FX deposit reserve requirement from 5% to 7%, which would withdraw around USD 13 Billion of FX liquidity in the market and remove some bullish pressure from CNY. The increase in FX deposit rate requirement suggests that policymakers are getting uncomfortable with the recent appreciation of the onshore Yuan as very rapid appreciation could compromise the organic growth of exports. The Renminbi remained virtually unchanged against the greenback in the middle of a very quiet Monday session but CNY stepped back during the early hours of today after Caixin Manufacturing were released meeting expectations. 


BRL remained unchanged against the USD, testing the month lows of the USDBRL convention. Yesterday, the Central Bank of Brazil, announced the fiscal deficit reduced 2.1% down to 10.76% of Gross Domestic Product (GDP) bolstered by record tax collection in April. The levels of public debt were also reduced down to 86.7% of GDP in April Vs. 88.9% registered in March. Later today, we expect Gross Domestic Product release for Q1 which and PMI manufacturing figures for May will provide important drivers for market participants.


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