Daily Market Pulse

FX market continues to monitor the Q3 earnings season


The USD bounced +0.53% from a three-week low against a basket of major currencies, influenced mostly by an investor risk aversion sentiment in the global market. Risk appetite decreased after Johnson & Johnson and Eli Lilly and Co said late on Tuesday that both are pausing all clinical trials of their Covid-19 vaccine candidates. The USD also found support after the IMF’s latest prospect showed the U.S economy will shrink 4.3% in 2020, much less than an initial estimate of 8% back in June. Today, the FX market continues to monitor the Q3 earnings season which has just started, as well as digest a stalemate in U.S stimulus talks after House Speaker, Nancy Pelosi, said the White House’s $1.8 trillion package proposal “falls significantly short” of expectations.


The euro closed 0.58% down against the greenback for the second trading session in a row. The USD strengthened against major peers as the global appetite for risky assets is deterring. The EUR also took a hit due to October’s ZEW sentiment data worse than expected. German economic sentiment fell to 56.1 vs. 70 (market forecast) in October from 77.4 in September, survey data from the ZEW - Leibniz Centre for European Economic Research showed on Tuesday. This was the lowest since last May. On the policy front, market participants remain cautious ahead of the EU summit starting on Thursday, with concerns arising about whether EU and UK negotiators will be able to reach a Brexit deal.


The GBP sharply decreased by 1.0% against the USD on Tuesday after two global health companies suspended their Covid-19 vaccine trial, which supported the global risk aversion, hence raising the demand for the greenback. The GBP also took a hit due to worries about little progress in Brexit talks, the chance that the Bank of England might adopt negative interest rates, and after August’s labor market report showed that the unemployment rate jumped to a three-year high of 4.5%. For today, the GBP may remain under pressure due to tomorrow's Brexit deal deadline, where the U.K. and European Union officials have been blaming each other for failing to compromise as they made little apparent progress toward a trade accord.


The USD went a bit higher against the JPY, weakening the Japanese yen by 0.16% during the trading session on Tuesday. The session was marked by a lack of agreement on additional U.S. fiscal stimulus, as well as a forced pause in Covid-19 vaccine trials, which weighed on market sentiment. After a quiet Tuesday on the Japanese economic data front, earlier this morning, a slightly lower revision sees Japanese factory output improve at a slower pace than initially estimated in August. The latest data released by the Ministry of Economy, Trade, and Industry, reported that the industrial production in August increased +1.0% vs. +1.7% previously estimated. Although the final data is lower than the preliminary one, the figure shows the Japanese industry is recovering thanks in part to the boost from fiscal and monetary stimulus measures.


The CAD kept relatively firm against a stronger dollar, shedding about 0.20% while EUR dropped 0.70% and GBP was 0.98% down. The CAD’s losses on Tuesday broke a recent rally of four-session, however, the Loonie continues to see support from a better than expected country’s economic recovery. Government assistance to households remains generous and the bounce back in employment is more impressive in Canada than in its neighbor, U.S. The Labor Force Survey reported a 378,000 rise of employment in September, more than double the consensus expectation of 150,000. It is a quiet day on the economic front, with market participants waiting for Bank of Canada's Tim Lane speech and Existing Home Sales, tomorrow.


Similar to its Latin American peers, the MXN also fell against the USD on Tuesday. The peso traded 0.57% down for a second straight day after Johnson & Johnson paused all clinical trials of its experimental Covid-19 vaccine after a study participant became sick with an "unexplained illness". Johnson & Johnson’s statement poured cold water on global risk-on sentiment, fading China’s economic data, which showed improvements in the country’s economic activity, as well as leading the Dollar Index to move away from a three-week low. Today, in the absence of economic data, the Mexican peso might again be influenced by external factors.


The Chinese yuan closed flat against the USD on Tuesday, with market participants continuing to digest the central bank’s decision, which removed the 20% reserve requirement ratio for yuan forward settlements. The positive market reaction to the latest data from China’s automobile industry and the Foreign Trade Department also helped to keep the CNY firmly up against the USD. Car sales in China increased 12.8% year-on-year to 2.57 million in September 2020, the sixth straight month of increase, as the vehicle market comes off lows hit during the Covid-19 lockdown. At the same time, China saw a sharp growth in imports and exports last month, indicating a fast post-pandemic recovery in domestic economic activity.


The BRL slipped 0.68% against the greenback after a long weekend amid new concerns about Johnson & Johnson's decision to pause its Covid-19 vaccine trials. The BRL also saw further pressure on its price after Petrobras, which is a state-owned oil and gas company, announced the start of an offer to buy back the shares of its subsidiary Petrobras Global Finances B.V, for a value around USD 2bn. The repurchase implies payment in USD to creditors, which indicates an outflow of capital, reducing the money supply in the country and, thus, exerting downward pressure on the BRL. Today, the FX market will keep an eye on Business confidence and Service Sector Growth indices, where both are expected to show how the Brazilian economy is progressing.  


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