Daily Market Pulse

Chip shortage eating into economic growth


The Dollar Index, which tracks the greenback against a basket of major currencies, kicked off the week on the wrong foot. The dollar closed 0.28% lower as the ISM manufacturing PMI index came in weaker than expected. The April Manufacturing PMI posted 60.7, down from 64.7 in March. Although this figure indicates a solid expansion in the overall economy, wide-scale shortages of critical basic materials (i.e. semiconductor chips), rising commodities prices, and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Looking ahead, the market’s sentiment towards a bearish USD trend is set to remain hovering in the FX market. This expectation is confirmed after last week saw a surge in USD net short position – according to CFTC report - suggesting that a downside trend is gaining momentum. Elsewhere, the economic calendar remains busy early in the month, with trade balance, factory orders, and NY business conditions, all due out later today.


Yesterday, the common currency took advantage of a weaker U.S. dollar, as the market’s enthusiasm towards the greenback continued to decline of late. With this, the EUR managed to recover (+0.35%) some lost grounds from the previous week. Looking ahead, the global semiconductor shortage remains at the center of investor concerns, weighing on the EUR as it eats into the European manufacturing growth rate. Automotive factories in Germany and Spain will halt output and possibly even shut down for several weeks due to this current semiconductor situation. Looking ahead, it is a quiet day on the economic data front. There are no relevant figures due out of the Eurozone to provide the EUR with direction, leaving it exposed to market sentiment and geopolitics developments.


The GBP/USD managed to print strong gains (+0.69%) on Monday, starting the week on the right foot amid a bank holiday where most of the traders were away from their desks. Nonetheless, from a big-picture perspective, the Pound remains range-bound since February, and it will likely need additional catalysts to gain momentum. For instance, the Bank of England tapering asset purchases this week could bring some new price action for the Pound. It’s a quiet day ahead on the economic calendar. April’s finalized Manufacturing PMI is due out later today, though it is unlikely to be a market mover. In general, FX markets may be very quiet ahead of the BoE’s policy meeting on Thursday, as investors and traders are likely to avoid placing large positions.


In the offshore market, the Japanese yen advanced 0.27% against the U.S. dollar as the yield on the 10-year U.S. Treasury note slipped to 1.60% from 1.65% late Friday. Domestic data was also favorable, as business conditions moved towards stabilization in March. Both activities and new business inflows decreased at softer rates, the former falling at the softest pace in the current 14-month sequence of contraction. Looking ahead, Japanese markets remain closed due to a bank holiday. 


The Canadian dollar continued to take full advantage of the softer greenback, and rose +0.04% on Monday, holding its three-year highs. The Loonie was also supported by PMI data showing that April data signaled another robust overall expansion in operating conditions in the Canadian manufacturing sector. In general, the Manufacturing PMI registered 57.2 in April, down from 58.5 in March, mainly driven by a surge in output and new orders, as well as rising stockpiles, suggesting greater production in the coming months. Looking ahead, investors will keep an eye on the latest developments in commodity markets which remain in an upward trend. If commodity markets continue to move higher, the CAD may reach new highs.


The Mexican Peso started May on a strong footing, ending 0.39% higher against the U.S. dollar on Monday. A jump in oil prices amid optimism over a solid demand rebound in the U.S. and China continues to help the MXN. On that note, new forecasts have predicted that crude oil prices could reach around $83/barrel in the second half of this year, as developed economies emerge from lockdowns, and as the intercontinental flight starts to pick up again. As expected (and already priced in), the Manufacturing PMI stood at 48.4 in April, rising from 45.6 in March, highlighting the slowest deterioration in the health of the Mexican manufacturing industry. Looking ahead, volatility might rise in the upcoming weeks, as investors have started to assess the outcome of the Mexican legislative election on 6th June.


Once more, ties between Europe and China appear to be quickly deteriorating, with European countries sanctioning new laws that will make life harder for Chinese entities to invest. The European legislation is moving in line with the Biden administration’s view on the standoff with China. As a result, the Chinese Yuan barely moved on Monday, closing flat against the U.S. dollar. Additionally, the light volume seen is also attributed by the long holiday in China, where Chinese traders will be away from their desks until Wednesday.


The Brazilian Real firmed (+0.01%) against the greenback on Monday despite seeing disappointing economic data. The PMI results for April showed further contractions in factory orders and production across the country, which resulted in the index retracting to 52.3 in April, down slightly from 52.8 in March. On the other hand, Brazil’s trade balance which posted a surplus of $10.3bi last month, mainly driven by higher commodity prices and weaker BRL, helped boost capital inflow. From the technical perspective, the BRL continued to trade around the 200-day moving average for the eighth session in a row, signaling that the mark is an important support level. Looking ahead, today will bring inflation updates, while investors wait for the interest rate decision tomorrow.


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