The USD dropped 0.3% with the dollar index (DXY proxy) to its weakest level since April 2018 before the trade wars and U.S. fiscal stimulus drove it higher. On the flip side, U.S stock markets were buoyed by a triple-hitter of positive vaccine news, stronger than expected U.S. economic data, and Janet Yellen's selection as President-elect Joe Biden's Treasury Secretary nominee. This background led the Dow Jones Industrial Average to cross a major milestone on Tuesday, closing above 30,000 for the first time ever. Looking ahead, today brings a busy line-up of U.S releases: New home sales; Personal income and spending; GDP and Fed minutes. U.S markets will be shut tomorrow and will face early closes in bond and equity markets on Friday.
The common currency rose 0.41% against a weaker USD on Tuesday on the back of a confluence of more encouraging vaccine news, EU announcements that pave the way toward lightening restrictions and uplifting words on the outlook from Fed speakers which buoyed appetite for high-beta assets. The EUR also found support after German official data showed that the gross domestic product (GDP) rose by 8.5% in Q3 compared with the previous quarter. Thus, the German economy could offset a large part of the massive decline in the GDP recorded in Q2 2020 due to the Covid-19 pandemic.
The Sterling traded higher for the third consecutive day on Tuesday, 0.25% up against the greenback. Apart from hopes of a cure for the Covid-19 pandemic, investors remain optimistic about a Brexit deal as representatives of the U.K. and the European Union continue to negotiate, aiming to bring positions closer in knotty issues with less than six weeks to the December 31, the day when the post-Brexit transition period ends. Earlier today, U.K. PM Boris Johnson announced that the Covid-19 lockdown will end next week and will be replaced by less burdensome restrictions and that the vast majority of British people will be vaccinated by April.
The weaker USD helped the JPY to recover some lost ground from the day before. The Japanese yen strengthened 0.11% against the greenback on Tuesday amid the Covid-19 vaccine progress and strong U.S business activity data, which both boosted hopes for a quick economic turnaround. Japan has had a poor macroeconomic week as to relevant data so far. Today, the country will release October Corporate Service Price Index, foreseen at a 1.2% annualized base, down from the previous 1.3%.
The CAD rose 0.63% against the greenback on Tuesday, as news that U.S. President-elect Joe Biden got the formal go-ahead to begin his White House transition had improved investor sentiment. Higher oil prices also contributed to strengthening the Loonie with West Texas Intermediate (WTI) crude oil hitting its highest level since March 5th. As Canada runs a current account deficit and is a major exporter of commodities, such as oil and agricultural commodities, the Covid-19 vaccine progress has so far cheered up the market’s sentiment towards an economic rebound in the coming year.
The MXN traded 0.81% higher against the USD on Tuesday, holding its strongest level since early March. The action price yesterday was driven by an upbeat note that its major trading partner and neighbor, the U.S, is likely to vaccinate key segments of its population by mid-2021, which should lead to rebounding in the U.S economy and consequently improving Mexico’s outlook. Inflation slowed down amid Mexico’s black Friday with headline and core annual inflation decelerating to 3.43% in H1 November (from 4.09% in H2 October) and 3.68% (from 3.96%), respectively. Although the central bank (Banxico) is likely to keep the policy rate on hold at 4.25% in the next monetary policy meeting in December, if lower inflation in the short term persists amid a stronger MXN, it will be more likely that Banxico will resume its easing cycle sooner than expected (Q1 2021). Today, the statistics institute (INEGI) will post September’s retail sales report which is expected to recover further to -6.3% year on year (from -10.8% in August), reflecting the easing of distancing measures.
Similar to major peers, the CNY also rose against the USD as the currency drew support from Premier Li Keqiang’s comments on Tuesday, as well as from an upbeat mood across the markets. The Chinese yuan closed up 0.08% and continued to hover around its strongest levels since June 2018. Top Chinese leader, Premier Li, said that China’s economy will return to the proper range of development next year and the country will maintain equal importance for imports and exports, where they want to achieve trade balance and sustainable development. Looking ahead, China’s industrial profits tomorrow will be watched for fresh insights into the strength of the economic recovery.
The BRL erased losses from the day before and led gains across Latin American currencies on Tuesday. The Brazilian real rose 1.20% against the USD after greater positivism coming from the external scenario, with President Donald Trump unlocking the way for a smooth White House transition. Domestically, the BRL found support after better-than-expected tax revenue data in October, signaling once more that the economy is recovering. According to the federal tax service, Brazil's federal tax revenue rose to 153.9 billion reais ($28.5 billion) in October, up 9.6% in real terms in the same month last year and more than 6 billion reais above the forecast. On the other hand, IPCA-15 inflation for the first half of November picked up from 3.5% y/y to 4.22% - which is above the government's target of 4%. Today, investors will wait for Foreign Exchange Flows release.