The dollar’s index held firm against a basket of major currencies on Tuesday, after soaring U.S. bond yields supported the USD, with the 10-year yield rising to as high as 1.311% from around 1.21% at the end of last week. This movement has been driven by increasing inflationary concerns amid a rise in energy prices along with the prospect of a massive U.S. fiscal stimulus. Higher yields, however, pose a major risk to equities and further pressure emerging market assets while the rise in Treasury yields could also be good news for the U.S dollar. Looking ahead, market participants will wait for January Retail Sales and December Producer Prices figures, as well as Minutes from the January FOMC meeting, which is also due later today.
The euro slipped slightly 0.18% against the U.S dollar on Tuesday despite strong German economic sentiment data. Yesterday's final economic report shows that the ZEW investor expectations index in Germany jumped to 71.2 in February, from 61.8 in January, extending the rebound from the drop midway through Q4 as new virus lockdowns were introduced. Also, the second fourth-quarter GDP estimate in the Eurozone didn't offer much in the way of news as it came in line with the initial estimate. In other news yesterday, the GDP report was accompanied by news that Eurozone employment rose by 0.3% quarter-on-quarter in Q4, slowing from a 1% increase in Q3, a decent result in light of the fall in industrial production. That said, the outlook is darkening.
The Sterling was steady against the greenback, having reached its highest level since April 2018 on Tuesday. Earlier today, official data showed that the Consumer Price Index (inflation, CPI) increased to 0.7% in January, from 0.6% in December, above the market’s consensus. January’s small rise in CPI inflation marks the first step this year towards an above-target rate by the autumn. Food inflation picked up to -0.7% in January, from -1.4% in December, narrowing the gap to the recent positive rate of producer and import price inflation. Looking ahead, market players will digest the fresh inflation numbers and watch for public comments from Bank of England Deputy Governor Dave Ramsden.
The USD/JPY pair touched its highest level since October after U.S bond yields jumped on the prospects of economic recovery and potential acceleration in inflation. The Japanese yen, which is very tightly correlated to U.S yields, reacted negatively and tumbled more than 0.6%, on Tuesday. On the economic front, in December, the tertiary activity index which gauges the changes in the Japanese domestic service sector declined for the second straight month a row, data from the Ministry of Economy, Trade, and Industry showed on Tuesday. The tertiary activity index fell 0.4% month-on-month in December, following a 0.6% decrease in November. Today, December machinery orders and January trade balance are due out.
The Loonie depreciated 0.38% against its rival U.S dollar on Tuesday after a high in U.S bond yields weighed on risk appetite. However, the positive Canadian economic data helped to limit further losses. Canadian home sales rose 2.0% in January from December, setting a new record amid strong demand in markets across the country, the Canadian Real Estate Association reported. Today, the Consumer Price Index for January is due, which will provide fundamentals for the Bank of Canada policy outlook. Inflation was surprisingly cold in December but likely to have warmed back up during the opening month of 2021.
The Mexican peso fell as much as 1% against the greenback on Tuesday as the recent rally in oil markets appeared to have paused. However, the recent energy reform proposed by Mexican President Andrés Manuel López Obrador was pointed as the major catalyst and the one that has been sparking concern in the local markets. If the bill is approved, that would give the state-owned electric utility of Mexico priority over private companies in providing electricity. On the other hand, the bill could contravene Mexico’s USMCA trade deal with the U.S. and Canada. Today, the energy reform will continue to occupy center stage and drive the MXN.
The Chinese markets remain closed for the Chinese New Year. The Chinese yuan remained steady in offshore trade, on Tuesday. There are no material figures to consider in the upcoming days.
Brazilian markets will have a late-opening due to the Ash Wednesday holiday. No significant data to be released. The Covid-19 pandemic in Brazil is still looking grim. As of Tuesday, the seven-day moving average for daily deaths is 1,057 and, for daily new cases, 45,707.