The U.S. dollar index, a coefficient used to assess the performance of the greenback against a basket of six major currencies, sustained momentum with bond yields and stocks edging higher ahead of July’s U.S. Nonfarm Payrolls report. Market participants will keep an eye open to wages data amid rising inflation and policymakers stepping closer towards tapering the bond purchase program. Optimism surrounding U.S. growth fuelled stock markets, with Nasdaq and S&P testing historical highs during yesterday’s trading session. The upcoming job report is set to show an increase of 870k new jobs in July, slightly higher than June’s readings at 850k. The Unemployment rate is expected to drop from 5.9% to 5.7%, while wages are expected to grow 0.2% to 3.8% annualized. Comments from Fed Vice-Chair Richard Clarida flagged that he sees inflation risk to the upside, and investors will keep an eye open for wage growth to offset this effect. The bond purchase program is currently buying USD 120 billion monthly, and Fed officials support announcing tapering these purchases before the end of the year. Tapering expectations and similar remarks from San Francisco Fed Mary Dale keep driving Treasury Yields higher alongside the dollar ahead of the jobs report.
The EUR fell 0.07% against the USD amid U.S. growth expectations driving equity markets higher and upcoming Nonfarm Payrolls, which carry high expectations. Covid cases in Europe remain stable around 140k new daily cases, suggesting an encouraging trend. However, we have witnessed some interesting variations, like in the case of France where cases had surged significantly, while in Germany infections remain relatively low. However, the economic bulletin from the European Central Bank suggests that European banks continue to improve their ability to face liquidity disruptions. Their aggregated liquidity coverage ratio, which measures their ability to meet short-term obligations, grew by 17.8% in the past year, signaling robust financial stability for the upcoming post-pandemic boom.
The Pound Sterling appreciated 0.28% against the greenback during yesterday’s trading session after the Bank of England (BoE) sustained interest rates unchanged and inched towards tightening its monetary policy by saying it could change “modestly”. However, members in the Monetary Policy Committee (MPC) remain significantly dovish, with Michael Saunders providing the only hawkish vote to support tapering the asset purchase facility. Despite raising its inflation forecast, Governor Andrew Bailey continued to talk down current inflationary pressures, referring to them as a “hump”, although he is concerned with secondary effects over the economy.
The Japanese Yen retraced 0.28% against the dollar amid optimism surrounding U.S. growth, which keeps pushing equity markets higher, and upcoming Nonfarm Payrolls data due later today, which bear high expectations. However, hawkish comments from Fed officials supporting tapering before the end of the year keep U.S. treasury Yields edging 2% higher, bolstering the demand for dollars. The 10-year bond yields providing 1.25% and equity markets recording solid gains have made it difficult for the Yen to find traction due to its safe-haven appeal. We could expect a risk-off shift overweighting the Yen if today's Nonfarm payrolls release considerably lower results than the 870k new jobs expected.
The Loonie closed out 0.26% higher against the dollar, supported by a rebound in oil prices throughout the course of the trading session. Overall, the market mood seems to be progressively recovering as growth expectations in the U.S. sparked euphoria in equity markets and allowed oil prices to recover. The West Texas Intermediate (WTI) retraced 1.54% after 3 straight days of snapping losses amid looming expectations of Covid cases growing in China, and the U.S. diminishing the prospects of oil demand. However, as the U.S. growth perception changes and Nonfarm Payrolls carry high expectations, the dollar takes advantage in the early hours of today’s session ahead of the report's release. Despite the market focus on the U.S. NFPs, Canada’s July job report is also due today, and markets anticipate Unemployment to fall by 0.4% to 7.4%.
The Mexican Peso rallied 0.13% against the dollar amid an improved risk-on sentiment as U.S. equities edge higher and a light local economic calendar. The market is currently eyeing the highly expected nonfarm payrolls in the U.S., which will set the risk mood for the upcoming weeks. A study from BBVA showed that millennials have played a fundamental role in the reactivation of Mexico’s economy during the pandemic. Analysts suggest that this workforce accounts for over 20 million people in Mexico, representing one-third of the labour participation. The study also signals that the wage difference between millennials and their predecessors, Generation X, was 12.3%, although millennials earn less income from property and interest, and receive fewer government benefits.
The Chinese Yuan remained trading within a tight range, recording mild gains during yesterday's trading session of 0.09% against the greenback. However, ahead of the much expected U.S. unemployment figures, the Yuan has eased slightly amid high expectations that this could affect the Federal Reserve’s monetary policy trajectory and fuel volatility in currency markets. Market participants acknowledge that timing the Fed tapering is crucial as that could allow the People’s Bank of China to ease its monetary policy to prop up the economy without triggering too much of a fluctuation in the FX market.
The Brazilian Real had a sharp retracement against the dollar, recording 2.51% losses during yesterday’s trading session, despite an improving risk appetite in the market and the Brazilian Central Bank hiking rates by 100 bps. The sour mood stems from ongoing concerns about the country’s fiscal situation and corruption scandals staining the popularity of President Jair Bolsonaro. Additionally, market participants keep a wary eye on the prospects for government spending and whether that might mean a bigger debt burden as President Bolsonaro confirmed plans to raise the payment to people in need from BRL 192 to BRL 300-400.