Daily Market Pulse

Brexit expectations and demands for a Covid-19 aid bill


The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.27% and extended its slide on Wednesday on the back of mostly weaker data and Trump’s threats to sanction the U.S fiscal stimulus. Although jobless claims declined to 803,000, they are still running well above 800,000. Personal income and spending declined, durable goods orders growth slowed and new home sales fell sharply in November. Today, Brexit expectations and U.S. President Donald Trump’s demands for a Covid-19 aid bill are still occupying center stage.


The Euro traded with a modest bid on Wednesday, posting gains (+0.2%) against the greenback. The common-currency was supported by a post-Brexit trade deal expectation, as well as broad-based U.S. dollar weakness. However, gains were limited because of ongoing concerns that the Covid-19 restrictions will be a drag on Q1 economic growth. Looking ahead, investors remain hopeful that a Brexit deal will be reached within hours.


The British Pound outperformed (+1.0%) its major peers on Wednesday as an announcement of a U.K-European Union trade deal is expected for today. If a post-Brexit deal agreement is reached after 4 years of negotiation, we will not only watch a sharp rally in the GBP but also broad-based gains in risk assets. If no deal is made, the reaction in GBP depends on whether the negotiations continue. The GBP is printing gains, stocks also got a boost and futures are climbing today.


The Japanese yen has posted gains (+0.08%) on Wednesday and continued to trade very much in an uptrend, albeit the USD has recently turned around to show signs of strength. The minutes from the October policy meeting showed a discussion regarding how to reach the 2% inflation goal, but unsurprisingly, the bank does not plan to make any wholesale changes. Yet, some of the nine board members expressed reservations about the current policy, which means the ever-cautious central bank remains committed to an ultra-accommodative policy, although this has failed to raise weak inflation levels.


The CAD recovered all losses from the day before, closing 0.49% higher against its U.S counterpart on Wednesday. Today, the trading session should be again uneventful and low-volume, as many market participants are off for Christmas day. The Loonie’s direction should be determined by shifts in U.S. dollar sentiment and international headlines. Canadian Gross Domestic Product for October is expected to rise just 0.2%.


The Mexican peso rose 0.27% against the greenback on Wednesday as the latest data showed Mexico’s economy grew slightly faster than expected. According to statistical institute INEGI, the country’s economy improved 1.6% in October compared to the previous month, extending a slow recovery after the impact of the pandemic. However, the MXN’s positive reaction was limited, since the economy was affected again due to new restrictions in the face of a rebound in the epidemic. Meanwhile, inflation was a shade below forecast in early December, easing to its lowest rate in six months.


The USD/CNY pair traded almost unchanged (-0.06%) on Wednesday, remaining firm in its downtrend against the greenback. Early today, Governor of the People’s Bank of China, Yi Gang suggested fundamental changes in the Chinese central bank’s future role. He also ratified that, to avoid monetizing the fiscal deficit, the central bank will aim for currency stability and solid employment growth. Also, this morning, China set off an investigation into alleged monopolistic practices at Alibaba Group and summoned affiliate Ant Group to a high-level meeting over financial regulations, escalating scrutiny over billionaire Jack Ma’s empire.


The USDBRL traded 1.09% lower against the USD on Wednesday amid a choppy trading session where the BRL oscillated between highs and lows, expressing its main characteristic - high volatility. The market continues to reflect the new strain of Covid-19 detected in England and which has led most European countries to restrict travel and close their borders to the United Kingdom. President Donald Trump's refusal to sanction the nearly $ 900bn economic stimulus package also lends a more negative tone, as the U.S. is experiencing a strong wave of infections, as well as seeing the closure of commercial establishments again. In the domestic scenario, the IBGE reported that the unemployment rate rose to 14.2% in November from 14.1% in October, accumulating a contingent of 14 million unemployed. In addition, FGV's latest Consumer Confidence Index registered its third consecutive monthly decline in December, reflecting a more negative perception of the current situation and the coming months. However, the recent optimism about vaccines and the strong economic recovery in Brazil should continue to support the trend of strengthening the Brazilian currency. Thus, the positive fundamentals should continue to prevail as we move towards the end of the year.


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