Daily Market Pulse

Rumors around Fed’s decision


The dollar index, which tracks the U.S. currency against six peers, was little changed (-0.01%) on Monday despite seeing a slight advance in the yields. This unnoticed movement reflects the caution that persists in the market ahead of the Fed’s policy meeting tomorrow. Although the American economy is far from the ‘substantial further progress’ threshold the Fed requires to taper its asset purchases, the Bank of Canada’s recent decision to reduce asset purchases sparked rumors that the U.S. central bank might be considering tapering of bond purchases. Looking ahead, the housing price index from the Federal Housing Finance Agency, and the consumer confidence reading for April, are the docket’s highlights.


The single currency slid 0.08% against the USD on Monday as official stats reported that German business confidence improved by less than expected this month as a third wave of virus infections and issues with the supply of chips in the automotive sector seemed to slow the recovery in Europe's largest economy. Meanwhile, investors were already pricing in the potential for another double-dip recession ahead of the preliminary GDP figures on Friday. Looking forward, the European Union’s improving vaccine rollout leaves the Euro well positioned to avoid large losses. Also, the Business Climate Survey from Eurozone is set to be published later today, although a muted impact on the market is expected.


The Sterling kicked off the last week of the month on the right foot, moving up +0.14% against the greenback. Because of a lack of economic data from the country, the wave of optimism that swept across markets yesterday may be the main driver behind GBP’s leap. Looking ahead, the Pound could trade higher this week as the gathering momentum in the world economy increases risk appetite. However, some political noise from Scotland’s parliamentary election on May 6th, might shake things up and raise some dust. Today, the first figures to be released from the U.K. are the Shop Price Index and Distributive Trades Survey, both from April.


Once more, a rise in the U.S. yields negatively impacted the Japanese yen on Monday. The JPY slid 0.21% against the greenback as the benchmark 10-year Treasury moved up to 1.58%, compared to 1.57% the previous market day., and ahead of Wednesday’s Federal Open Market Committee (FOMC)’s policy decision. Meanwhile, the JPY showed a muted response after the Bank of Japan kept its monetary policy on hold as widely expected. Looking ahead, 10-year Treasury yields movements ahead of the FOMC decision could intensify downward pressure on the Yen. Elsewhere, the State of Emergency in four Japanese cities, including Tokyo, Osaka, Kyoto, and Hyogo have been implemented and may keep the currency on the back foot due to the economic impact ahead of the Olympic Games.


In Canada, the Loonie strengthened +0.65% to its strongest level in nearly six weeks against its U.S. rival on Monday. Most of this movement came about with market players pricing in the Bank of Canada’s decision, last week, to cut the pace of bond purchases and potential interest rate hikes next year. Furthermore, investors also weighed the prospects of the U.S. Federal Reserve maintaining its dovish stance at a policy meeting this week, albeit there are speculations that the Fed might consider slowing down its purchase program. Looking ahead, this stark contrast between central bank’s stances may lead investors to continue to raise their bullish bets on the Canadian dollar, a fact that is already illustrated by data from the U.S. Commodity Futures Trading Commission, which showed that net long CAD positions are at the highest in seven weeks. 


In Mexico, downbeat economic data overshadowed the commodity’s rally which picked up emerging market currencies. According to official data, Mexican economic activity dropped 4% year-over-year in February, mainly driven by weakness in the manufacturing and services sectors. Remarks from Mexican central bank board members soured, even more, the disappointing reading “With this data, we expect a rate of around 0.0% (economic growth) for the first quarter of the year. A not so good start to the recovery,". Thus, the Mexican peso tumbled 0.12% against the greenback on Monday. Looking forward, trade balance figures are due later today and may drive greater attention.


The Chinese yuan advanced 0.09% against the greenback on Monday, after trading most of the time within a narrow range. The light volume registered on Monday’s trading session suggests that the caution persists as market players await the politburo meeting, the top decision-making body of China’s ruling Communist Party, for comments and guidance on policy deliberations. The outcome of the meeting is so material, that market participants overlooked the impressive results of Chinese companies. Profits at Chinese industrial firms soared 92.3% in March from a year ago, supported by a booming economy and rising factory gate prices. Although there is a base effect on those numbers, industrial profit growth performed well amid several supply shortages and high commodity prices.


Tailwinds from abroad and domestic markets helped the Brazilian Real to kick off the week on the right foot. The BRL moved up 0.71% after commodities prices soared, in particular agricultural ones, including soybean, corn, wheat, and lumber. All this is a clear sign that inflation is set to rise this year as the global economy rebounds from the pandemic. On that note, the Banco Central Focus Market Readout survey showed that Brazil's 2021 inflation outlook rose to 5% for the first time and the interest rate outlook hit a new high of 5.5%, a sign that the central bank will raise rates aggressively at its next policy meeting. Looking ahead, investors will continue to digest remarks from House of Congress, Arthur Lira, which commented that Congress and Senate are expecting to vote on either Tax and Administrative reforms in 2021. On the economic front, the Consumer price index (IPCA-15) is due today and may concretize the signs above.


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