Daily Market Pulse

Policy and polls across Britain


The dollar index was almost flat (-0.02%) on Wednesday, consolidating previous gains. Chatters over reflation are quietening as many members of the Fed came together to reject the rate hike fears. Nevertheless, inflation concerns are not going away and the debate rages on as to whether price pressures are going to materialize. Looking ahead, a key jobless claim report that may provide clues on when the Federal Reserve will dial back monetary stimulus will be released later today. Elsewhere, on the risk-positive front is U.S. President Joe Biden’s support for a vaccine patent waiver and push for more stimulus.


The Euro slid -0.06% against the greenback on Wednesday despite seeing positive data from the Eurozone. The Composite PMI recorded 53.8, up from 53.2 in March, indicating that growth of the eurozone private sector economy improved during April, as well as illustrating the fastest expansion since last July. For today, the single currency might react to the upbeat data published this morning from Europe's largest economy. The German Factory Orders increased by 3% in March, well above the market forecast of 1.7% and suggesting that manufacturers in Germany are likely to cushion a drop in household spending. Looking ahead, March retail sales data is also due from the eurozone and can offer intermediate moves to the market ahead of the key Bank of England meeting and local elections in the U.K.


The British pound gained 0.17% against the dollar on Wednesday as a poll showed Scotland’s main pro-independence (Scottish National Party) party was unlikely to win an outright majority in today’s election. However, it is expected that a majority of Scottish members of parliament in favor of independence will be elected. For U.K. Prime Minister Boris Johnson this will present a real threat: a parliament at Holyrood claiming a mandate for another independence referendum. Looking ahead, today will be a busy day, with local elections taking place across the U.K, marking a major electoral test for Boris Johnson. At the same time, the Bank of England will meet to decide the monetary policy’s future, as well as updating its economic outlook. Volatility is expected.


Yesterday, local markets remained closed due to the long public holidays. Although the Japanese yen edged 0.10% up, it has been trading sideways against the U.S. dollar since the start of the week. Today, Japanese traders return to trade for the first time this week and they should price in the recent Covid-19 pandemic situation in the country, as the Japanese government is under immense pressure to extend the third emergency alert beyond May 11 deadline. Looking ahead, job numbers from the U.S. coming out on Friday will probably cause quite a bit of noise in this market, as some bond sell-offs are expected.


The Loonie strengthened 0.29% against its U.S. rival on Wednesday, touching its highest level in more than three years. The currency has appreciated a total of 3.7% year-to-date as of Wednesday. The CAD’s leap is widely supported by improved investor sentiment and the Bank of Canada’s recent shift to a more hawkish tone. Obviously, the recent spike in commodity prices has also bolstered the oil-linked CAD. Looking ahead, new clues to the central bank's policy outlook could come from Canada's April employment report, due for release tomorrow. The finalized Ivey PMI report is also expected to be published on Friday.


Yesterday, the Mexican peso fell -0.15% against the greenback for the second trading session in a row. There is no specific catalyst acting in the Mexican market at the moment. The recent MXN’s declines were driven by international macro fundamentals, mainly with the Mexican currency reacting to the U.S. economic growth. Recent OECD research has shown that Mexico's annual energy price fluctuation was 14.5%,only exceeded by Norway and Canada, which reached a fluctuation of 23.7% and 19.1%, respectively. In general, the official inflation accelerated faster than expected in the first half of April to 6.05%, the highest level in more than three years and well above the central bank target of 3%. Looking ahead, fresh inflation updates will be published tomorrow, along with the consumer confidence index for May.


Chinese markets were closed yesterday. Earlier this morning, in the Asian trading market, the Chinese yuan eased (-0.08%) to a one-week low against the dollar on the first trading day after the long Labor Day holiday, as market players continued to track movements in the dollar. Elsewhere, while responding to the global ire over the trade and political behavior, China suspended economic dialogue with Australia as relations curdled. Looking ahead, it’s worth noting here that the US-China phase one trade deal will soon be discussed and it's likely to be a difficult negotiation.


The Brazilian real outperformed among its peers on Wednesday after strong economic data and another rate hike. The BRL jumped as much as 1.69% against the U.S. dollar, with market players reacting positively to the Central Bank’s decision to increase the basic interest rate by 75bps, taking the base rate to 3.5% p.a. Although this was widely expected, the Bank delivered a more dovish tone, sticking to the message that it will keep a partially expansionary stance at the end of the cycle. Recent economic data also was somehow supportive. Industrial production declined 2.4% month-over-month in March, below forecasts (-3%) and despite the drop, industrial production remains close to pre-pandemic levels. Looking forward, the fresh rate hike will continue to provide an upbeat sentiment to the BRL, as the new Selic level helps curb elevated inflation rates and support weak fiscal conditions.


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