Daily Market Pulse

U.S. inflation figures amid conflict hot spots


The dollar fell 0.13% against major rivals at the beginning of the week, although some gains in Treasury yields were seen, with market participants pricing in the anticipated U.S. inflation data. Elsewhere, it is worth highlighting a rising geopolitical risk that may have an unexpected impact on foreign exchange markets. Three focal tensions are bubbling away at present: (1) between China and Taiwan; (2) the continued build-up of Russian troops on the Ukraine border; (3) renewed tensions in Iran and Yemen. On the economic front, the highly expected U.S. inflation figures are due today. A higher than expected reading may result in a rise in yields, hence in the USD.


The single currency managed to regain some territory against the greenback on Monday, after closing 0.08% higher amid improving Eurozone retail sales. Official data showed that retail sales across the bloc rose 3% month-to-month in February, rebounding after a revised -5.2% decline in January and ahead of expectations of a 1% increase. The improvement in retail sales was thanks to easing lockdown measures in Spain and Germany. Later today, on the economic front, market players will have a chance to look at the Eurozone and Germany ZEW Economic Sentiment Index for April. If the highly expected reports indicate that the rebound of the Eurozone economy is starting to fade, the EUR may find itself under pressure.


Yesterday, the Sterling found some demand and closed 0.26% up against the U.S. dollar. Domestically, March’s BRC Retail Sales Monitor painted an upbeat picture of sales that favors online shopping and home-centric categories. Online non-food sales increased by 94.0% year-over-year, against a growth of 3.0% in March 2019. In general, sales increased by 8.3% in March compared to the same period in 2019, against a decline of 0.5% in March 2019. As a result, investors are now more hopeful about the outlook for the services sector, which could begin to make a further recovery now that non-essential shops are open for business. Looking ahead, February’s U.K. GDP data will be published today, along with a raft of economic data from the manufacturing sector.


The Japanese yen printed some gains (+0.27%) over the greenback on Monday despite the U.S. 10-year yields also moving up. The JPY reacted positively to the publication of the Japanese Machine Tool Orders figure for March. The data revealed that tool orders had increased by 65% last month. Consequently, investors and traders are more confident about the prospects for Japan’s manufacturing sector in the near term. On that note, Bank of Japan Governor Haruhiko Kuroda said the Yen is moving at levels considered an equilibrium and the current value is helping manufactures to boost the value of profits earned overseas. Today, market players will wait for the U.S. inflation data and its impact on the U.S. yields.


A more optimistic Bank of Canada survey was not enough to provide support to the Loonie, which fell 0.29% against its U.S. rival on Monday. The Business Outlook Survey indicator moved up again, signaling a further improvement in business sentiment as most businesses are no longer preoccupied with pandemic-related uncertainty. Although the BoC’s survey could be a bit biased, because the interviews were done before the recent decisions to tighten public health measures, more optimism from businesses and some early evidence inflation expectations creates an environment for the central bank to announce a reduction in the pace of asset purchases in the foreseeable future.


In Mexico, the pair USD/MXN traded flat on Monday after official data reported that 88,771 new formal jobs were created during March, an increase of 0.4% month-to-month. In general, market participants continue to monitor the Mexican inflation as previous data is consistent with the idea that inflation pressures are gathering speed, which will lead Mexico’s central bank to hold its interest rate unchanged for the foreseeable future. Rising commodity prices, however, are a double-edged sword for Mexico, first, it’s an upside risk for inflationary pressure but also it’s an important support for the oil-linked MXN.


The Chinese yuan started the week flat against the greenback after new bank loans in China rose more than expected in March from the previous month due to strong corporate and household demand. Official data showed Chinese banks extended $416.62 billion in new yuan loans in March, up from 1.36 trillion yuan in February. On the one hand, this reading is supportive of the CNY, as it suggests a rapidly recovering economy. On the other hand, there are worries about an emerging debt risk and a potential bubble in domestic financial markets. Looking ahead, China published its trade balance earlier today, which showed that exports rose 30.6% year-over-year in March and imports rose 38.1%. Thus, market players will fully digest these numbers and their impact on the CNY.


The Brazilian Real kicked off the week on the wrong foot, dropping 0.88% against the U.S. dollar with investors closely watching the Parliamentary Inquiry Committee (CPI) of Covid-19. The CPI intends to investigate possible omissions by the federal government in dealing with the Covid pandemic. Looking ahead, uncertainties around the federal budget remain high, given the dynamics of the pandemic and the economic and social consequences, analysts are forecasting a primary deficit of 2.8% GDP in 2021 and 2.0% of GDP in 2022. On that note, the fiscal risk is likely to affect the BRL, as well as deteriorating the Ministry of Economy and Congress relationship. Today, March’s retail sales figures will be released and are set to show some decline due to the imposition of new restrictions to curb the virus spread.


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