Daily Market Pulse

The EZ economy is still “clouded with uncertainty”


The benchmark 10-year yield closed flat at 1.57% on Thursday, remaining in the 1.5%-1.6% range for several days and capping U.S. dollar strength. Thus, the Dollar Index, which tracks the USD against a basket of major currencies, found a little bid and edged 0.17% higher. Also, another strong day for the agricultural commodities yesterday, with soybeans up by 2.4%, corn by 4.0%, and wheat by 5.5%, may have limited further USD’s gains. On the economic front, U.S. initial jobless claims fell to 547,000 last week, suggesting layoffs were subsiding and strengthening expectations for another month of job growth in April as a reopening economy unleashes pent-up demand. Looking ahead, flash PMI and new home sales are due later today, with the latter reporting a significant increase in March after severe winter weather depressed sales in February.    


The European Central Bank (ECB) met yesterday and left policy unchanged. ECB President Christine Lagarde commented policymakers had not discussed any reduction in the bond-buying program because “it is premature” and the economy is still “clouded with uncertainty”. As a result, the single currency slid 0.17% against the greenback. Looking ahead, market participants will analyze the ECB’s balance sheet and its impact on the bloc’s public account, as it has been rising over 65% of GDP. Elsewhere, French, German, and Eurozone private sector PMI figures for April are due out. While Germany’s manufacturing PMI tends to be in the spotlight and drive greater attention.


The Pound declined sharply by 0.67% against the greenback on Thursday, extending losses for the third straight trading session. Difficult to say if there were macro fundamentals behind this decline, although there are renewed concerns about new Covid-19 cases across the world. On that note, the U.K. is instating a quarantine requirement for travelers from India, in response to spiking cases caused by a new variant found on the subcontinent. Looking ahead, the technical picture may play an important role in the GBP market, as the currency has been trading close to the 50 and 20-day moving average.


Unexpectedly, the flash PMI survey provided support to the Japanese yen on Thursday, with the currency climbing further 0.1% and consolidating recent gains against the greenback. The Composite PMI survey showed that the Japanese private sector economy returned to expansion territory for the first time since January 2020, thanks to growth in new business for the first time in 15 months, as well as a renewed expansion in export sales, which rose at the quickest rate since February 2018. However, the survey also reported that some private sector businesses noted that a resurgence in Covid-19 cases could dampen prospects in the second quarter of the year. Looking ahead, market participants will wait for manufacturing PMIs from Europe, which tends to garner the greatest interest.


The Loonie printed a small move (-0.06%) against its U.S. rival on Thursday, but consolidated its gains from the day before as market players assessed the potential for the Bank of Canada to shortly reduce stimulus further. On Wednesday, the central bank left interest rates unchanged but said it would trim its weekly net bond purchases from C$4 billion ($3.2 billion) to C$3 billion effective April 26. On the economic data, the strong demand for new houses, fueled by lower borrowing costs and work from home restrictions, continued pushing up new home prices in March. As a result, Canadian new housing prices rose 1.1% in March from February, climbing 7.9% year-over-year. The data is fresh evidence that the BoC may tighten its monetary policy in the upcoming months in order to avoid a bubble risk in the domestic market.


The Mexican Peso fell 0.30% against the U.S. dollar, continuing its “sideways” movement for the fourth straight session. The recent consumer price reading showed that annual inflation rose faster than anticipated in the first half of April, reaching its highest level since 2017 and far surpassing the central bank's target range. The fresh reading is a double-edged sword because, on the one hand, it is extra fuel for the Central Bank to keep the interest rate at 4% for an indeterminate time, which is favorable for the peso, as it is likely to be supported by steady interest rates. On the other hand, higher inflation with slow economic recovery amid surging new Covid-19 cases is a dangerous combination.


The Chinese yuan was almost unchanged (-0.01%) against the dollar on Thursday. The currency remains firm against its major peers while China’s Central Bank continues to quietly tighten liquidity in the financial system. Surging capital inflows as foreign investors are hunting higher yields are also proving to be favorable to the CNY. Looking ahead, as the economic calendar is very quiet, Chinese traders will continue to seek opportunities and fundamentals abroad. Better vaccine rollout in the European Union is expected to boost the EUR, as the CNY and EUR show a strong correlation (over 86%), their close correlation also might help the CNY in the absence of domestic news.


The Brazilian Real jumped as much as 2.24% against the greenback, registering its strongest upside daily movement since the end of March. The main factors behind this positive move were: (1) President Bolsonaro signed off on the 2021 Federal Budget, which finished with the long-running imbroglio around the proposal; (2) strong capital inflow was registered during the session, and; (3) a technical correction movement to catch-up its peers after a holiday, where markets were closed. Looking ahead, the current BRL level is hovering near to the 200-day moving average level, which is seen as an important resistance level. Market players will continue to digest the outcome of the new federal budget on the spending cap framework, as it may represent a negative development for the country’s sovereign credit profile.


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