Daily Market Pulse

FX markets are awaiting the runoff elections for the U.S Senate


The US dollar‘s weakness has extended into 2021, with the USD falling 0.14% against a basket of major currencies on Monday, and, surprisingly, the S&P 500 also ended the day down (-1.52%). According to the latest data from the Commodity Futures Trading Commission, net short non-commercial positions in USD remained at the highest level in a decade. Today, all eyes will be on the state of Georgia, as the state holds a runoff election for two seats in the U.S Senate. The runoff election is critical because it will determine control of the Senate, and if the Republicans can win one of these seats, they will retain control of the Senate, which could throw cold water on Democratic plans for stimulus plans and tax hikes.


The single-currency was unchanged against the safe-haven USD on the first trading session of 2021, albeit positive eurozone manufacturing PMI numbers showed that the index improved to its highest since May 2018 during the final month of 2020. Nonetheless, market players may already be pricing in a potential “double-dip” recession over Q4/20 and Q1/21 as a consequence of the various tighter lockdown restrictions that have been taking place across eurozone members, which could limit the Euro’s ascent against its counterparts. Looking ahead, Germany’s retail sales and unemployment figures should have an impact on the FX market.


Unsurprisingly, the Covid-19 pandemic remains at the center of the narrative. People in all of England and most of Scotland must now stay at home except for a handful of permitted reasons, as new lockdowns begin in both nations due to the rise in infection cases. Moreover, PM Boris Johnson warned the coming weeks would be the "hardest yet". Against this backdrop, the Pound slid 0.82% against the greenback on Monday. Despite the GBP ending the day in the red, deployment of Covid-19 vaccines offers light at the end of the tunnel. On the data front, the Manufacturing PMI rose to its highest level in over three years in December, mainly reflecting a boost from last-minute preparations before the end of the Brexit transition period. Today, inflation numbers come out, which could draw interest.


The USD/JPY pair continued to trade with an overall downtrend on Monday. The Japanese Yen rose 0.14% as market players priced in the fact that there is a significant amount of stimulus coming out of the U.S. The JPY also found support from PMI numbers, which showed the manufacturing sector ended 2020 with operating conditions stabilizing in December, marking the end of a 19-month sequence of decline. The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index rose from 49.0 in November to reach the 50.0 threshold-mark in December. Today, more PMI data is due out.


The Loonie kicked off with losses on the first trading day of the year. The CAD slid 0.39% against the U.S dollar on Monday after the Organization of the Petroleum Exporting Countries (OPEC) and its allies’ virtual meeting was unexpectedly put off for this afternoon. The meeting was suspended after a majority of members, including Saudi Arabia, opposed Russia’s proposal for a February supply hike. Besides, the CAD’s losses were capped as Manufacturing PMI rose to 57.9 in December, up from 55.8 beforehand. This marked a record high for the index. The PMI remained in the expansionary territory since July, as manufacturing has benefited from stronger demand for Canadian goods from the US and Asia.


The Mexican peso fell 0.47% against the greenback on Monday as market players are awaiting the runoff elections for the U.S Senate in the state of Georgia. The runoff elections in Georgia today will determine which party wins control of the Senate and influence President-elect Joe Biden’s agenda, which has the potential to improve the prospects for economic recovery and, in turn, generate positive spill-over effects on the Mexican economy. Also, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) talks were unexpectedly suspended on Monday. Discussions will resume this afternoon, giving the group more time to resolve differences over how much extra oil the market can take. The outcome of this meeting is an important drive for the oil-related MXN.


The Chinese yuan has made a roaring start to the year. The CNY closed 1.12% up against the greenback on Monday after PMI numbers confirmed that the health of China's manufacturing sector continued to improve in December, albeit at the softest rate for three months. The manufacturing PMI slipped from 54.9 in November to 53.0 at the end of 2020, remaining in the expansion territory. The gradual but undeniable relaxing of FX controls by China’s central bank (PBoC) suggests that the PBoC no longer feels the need to defend the CNY as much, which has been fueling the market players’ confidence that the authorities will tolerate further currency strength.


The Brazilian Real which was one of the worst-performing emerging market currencies in 2020, continued its depreciation and tumbled 1.5% against the USD in the first trading session of 2021 on Monday. Although PMI numbers showed that the recovery of the manufacturing sector from the Covid-19 pandemic continued in December at a faster pace, as well as the country led the global production upturn for two consecutive months, there are concerns about the rapid spread of Covid-19 during the holiday season. Moreover, Brazil has been left behind with regard to vaccination programs, even compared to other Latin American countries like Argentina, Mexico, and Costa Rica.


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