Daily Market Pulse

Bank of Canada is set to reduce monetary stimulus today


The dollar index, which tracks the U.S. currency against six major peers, was able to post a slight comeback (+0.17%) on Tuesday, breaking a sequence of six straight sessions of losses. However, it has declined over 2% so far this month due to lower long-term yields. Looking ahead, without any material U.S. data, headlines and developments in Wall Street might dictate movements in risk sentiment and drive the USD over the session. At the same time, as the pace of vaccinations is slowing slightly, the virus cases count remains stubbornly high, and the U.S. involved in different geopolitical tensions, the financial markets could see themselves under pressure.


Yesterday, the single currency closed flat against the U.S. dollar, consolidating Monday’s gains. Domestically, Eurozone bank lending conditions to households and firms were tightened in Q1, a toxic combination that challenges the bloc’s slow economic recovery from the pandemic. According to the official report, businesses seem to be postponing investments, as the pandemic triggers fresh lockdowns and other restrictions in many parts of Europe. Apparently, the EUR ignored this dour survey, but it weighed on stock and bond markets. An index of eurozone bank shares dropped by more than 2%. Yields on benchmark German 10-year bunds slipped to minus 0.25% from minus 0.24% a day earlier. Looking ahead, market players will continue to keep an eye on German bonds as they have been busy creeping higher and providing crucial support to the EUR. Bond yields have risen as expectations continue to improve for European growth.  


The Sterling ran out of steam against the greenback and closed in negative territory (-0.36%) on Tuesday. Although economic data was positive as the unemployment rate slipped beneath 5.0%, with job creation performing better than expected, this did little to support a sluggish GBP. Earlier today, official data showed that Britain's annual inflation rate accelerated by 0.7% year-over-year in March, with rising prices for clothing and motor fuel the major changes. Looking ahead, the recent inflation reading could stock market fears of spiking prices when the nation emerges from the pandemic. However, the current inflation is still well below the Bank of England’s 2% target for 1 ½ year.


The Japanese Yen placed new gains of 0.06% against a weaker U.S. dollar following the largest daily drop in the stock market across the world. The 225-issue Nikkei Stock Average was down 1.97%, the Dow Jones Industrial down 0.86%, the S&P 500 lost 0.90%, and the pan-European STOXX 600 index dropped 1.90%. In general, stocks tumbled as rising virus cases around the world led to renewed concern about their economic impact. Meanwhile, investors also kept an eye on flare-ups in Iran, North Korea, and the Taiwan Strait. Looking ahead, Japan's government is considering a state of emergency for Tokyo and Osaka as new Covid-19 case numbers surge. If confirmed, the Japanese currency and shares might trade sharply lower in the upcoming weeks as investors would price in the economic losses, along with the slow pace of vaccinations. 


The oil-linked Loonie took a hit (-0.62%) against its U.S. counterpart as crude oil prices fell almost 0.8% on concerns that surging Covid-19 infections in India will bring restrictions and reduce oil demand. The CAD’s drop was in tandem with pushback in Canadian government yields. The 10-year fell 4.5 basis points to 1.510%, pulling back from an earlier three-week high at 1.586%. Looking ahead, the Bank of Canada is widely expected to become the first major central bank to reduce monetary stimulus today. Not only is the Bank set to announce a $1 bn/week reduction in its weekly government bond purchases, but it will also issue a new forecast, one that will look more optimistic.


As crude oil prices dropped on demand worries, the Mexican Peso fell 0.78% against the U.S. dollar interrupting a sequence of six consecutive trading sessions of gains. Crude oil WTI traded down 1.48% on Tuesday on the back of demand fears, sparked by a rise in the number of Covid-19 infections in one of the world’s largest oil importer, India. Meanwhile, sentiment over emerging market (EM) assets, including the MXN, was helped by major market players going bullish on currencies and bonds amid stability in U.S. yields. Looking ahead, a weaker USD tends to draw carry traders to high-yielding EM currencies, and the MXN is the front-runner in the current environment. 


Once more, the Chinese yuan firmed against the U.S. dollar on Wednesday, extending gains for the seventh straight session. The CNY rose 0.19% as the USD continued to languish abroad, hovering just above a seven-week low with subdued U.S. bond yields reducing the currency’s yield allure. Elsewhere, under its “One-China Principle”, Beijing has been making sweeping claims over Taiwan and has even threatened to take control of the island by force, if required. Yesterday, according to local news, dozens of Chinese aircraft conducted a nine-hour long aerial bombing exercise after U.S. President Joe Biden and Japanese Prime Minister Yoshihide Suga expressed deep concern over Taiwan. Looking ahead, a flare-up of tension between China and Taiwan could spark a flight to safety, diminishing the CNY’s price.


The Brazilian Real slid 0.41% against the greenback on Tuesday after the federal government eased significantly fiscal policy to tackle the Covid-19 pandemic. According to local news, the administration and Congress reached an agreement regarding the 2021 budget, as a new bill was approved allowing new extraordinary spending measures to be enacted, breaking through the spending ceiling rules. The measures in question would be: additional spending on health, a new round of credit subsidies for small companies, and a new round of the labor contract suspension program. As a result, it is expected the Bolsonaro’s administration will breach the spending cap rule by around USD28.5bln, leading to a roughly 2.5% deficit. Looking ahead, more concrete details will be released on Thursday when president Bolsonaro will sanction the budget. Financial markets will be closed today due to the national holiday Tiradentes Day.


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