Daily Market Pulse

A mutant Covid-19 offsets positive environment


The biggest catalyst for the current price action of the USD is the new strain of the Covid-19 which offset the positivity from the U.S stimulus package. The FX markets reacted quickly to the U.K health officials saying that the virus is spreading 70% faster than the original. Against this backdrop, the DXY which tracks the USD against a broad basket of major currencies rebounded 0.19% on Monday. Today, market participants will wait for the final reading of the US Q3 GDP data. Economists expect the data to show that the economy rose by 33% in the third quarter. Thus, since this number will be in line with the past two readings, traders don’t expect a lot of movements on the USD price action.


The new strain of Covid-19 spreading across the U.K faded the risk-on sentiment, which led investors and traders to run towards the safe-haven USD on Monday. Although the common-currency suffered sharp losses at the open, the EUR managed to limit its losses to close down 0.11%. The outlook for January is looking grim for Germany, GfK said earlier today. GfK's forward-looking consumer sentiment index is set to fall to minus 7.3 points in January as the measures taken in November for a light lockdown in Germany did not bring the hoped reduction in new infections and led the whole country to a new hard lockdown, where the consumer climate will face yet another setback.


The GBP/USD pair dropped 0.38% during the beginning of the week after the U.K. was isolated from multiple European countries over the spread of a mutated version of Covid-19. The hard-hit travel sector once again was the most affected by the new restriction measures with airlines like British Airways and EasyJet seeing double-digit percentage declines before paring losses. Turning to Brexit, the EU is considering a fresh proposal on fishing rights as Prime Minister Boris Johnson aims to secure an 11th-hour trade deal. Upcoming data includes a final reading of third-quarter U.K economic growth, but that is likely to have a muted impact on FX markets.


The news headlines yesterday in Europe contributed to the JPY recovering some lost ground against the USD. The Japanese yen climbed 0.19%, outperforming its major peers amid risk-off flows. Moreover, during Monday’s Asia Pacific session, Japanese PM Yoshihide Suga said the Japanese Finance Minister will not let the USD/JPY pair depreciate below 100. The Nikkei report added that his comment came with an “unspoken message” that the Finance Minister should be prepared to sell JPYs for USDs if the pair breaches this threshold.


The Loonie depreciated 0.34% against a stronger greenback in tandem with oil prices on Monday. Brent futures slumped below $50 a barrel while West Texas Intermediate closing down 1.73%, with investors fleeing the market as a mutation of Covid-19 discovered in the U.K. threatened more lockdowns across Europe. The CAD losses were capped after the real estate market showed very large advances in November. Nationally, new house prices rose 4.6% year over year in November – the largest increase in more than a decade (since April 2008), despite a new lockdown in much of Canada.


Unsurprisingly, the Mexican peso also took a hit from the international headlines, after the discovery of the new Covid-19 strain. The MXN inched down 0.10% against the greenback on Monday. Weaker Mexican retail sales figures also contributed to weight on the MXN after the National Statistics Agency (INEGI) showed that retail sales fell by 1.4% in October from September in their first monthly decline since April. The reading signaled the pandemic has had a substantial effect on the Mexican labor market. Although the country is excited to see the arrival of Covid-19 vaccines, its distribution faces great challenges.


The CNY dropped 0.14% to a one-week low against a stronger USD amid central bank policy decisions. Yesterday, the central bank left its loan prime rate (LPR) unchanged. The one-year LPR was left at 3.85%, while the five-year LPR held steady at 4.65%. Both rates are the benchmark for corporate and household loans. The central bank’s decision reflected continued economic recovery from pandemic shocks in the economy and comes after the central bank made its biggest ever injection of medium-term funds last week to raise liquidity. Traders are expecting a CNY appreciation in the coming days as the year draws to an end and corporates need to convert their dollar holdings to yuan for various payments.


The Brazilian real dropped 0.40% against the USD on Monday amid renewed panic in Europe after the U.K imposed tough restrictions to combat a new Covid-19 strain. The rapid spread of a mutant strain of the Covid-19 led agents to adopt a more cautious tone in business across the globe, which penalized emerging market assets, with investors looking for safe-haven currencies. Today’s economic calendar brings out the FGV Consumer Confidence Index and Mid-Month Consumer Price Index, both widely expected by market participants as economic activity grows at a faster pace. 


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