Daily Market Pulse

Greenback holds firm amid optimism and risk on sentiment


Despite optimism and the broader risk-on mood in global markets, the greenback holds firm amid U.S. treasury yields edging higher as the dollar attempts a bounce back. The U.S. dollar index, a benchmark used to assess the value of the greenback against a basket of six major currencies, sustained pressure from broader upbeat mood as investors rejoice from Fed officials refraining from tapering and expectations around Chinese policymakers deploying further stimulus to incentivize economic recovery following the latest outbreak of the Delta variant. Asian stocks are rallying ahead of the European Central Bank and Bank of Canada’s monetary policy decisions, suggesting positive expectations from policymakers amid current market conditions. Today, the U.S. and Canada will be back in the offices following the Labor Day holiday, although we expect a quiet session amid an empty economic calendar, with sentiment drivers defining the direction of the dollar. 


The common currency remains on the front foot amid a broader upbeat sentiment which takes clues from easing coronavirus fears and vaccine hopes, as well as escalating conversations over the European Central Bank (ECB) withdrawing stimulus. Market participants continue to mount bets on the ECB’s hawkish hold this week, even after following comments from Francoise Villeroy de Galhou, Chairman of the French branch of the ECB, clarifying that “the first P in PEPP stands for pandemic, not permanent, and for a good reason”. Alleviating Covid cases in the old continent keep contributing to the upbeat sentiment and the likelihood of policymakers to withdraw stimulus. The upcoming ECB meeting will be key, as policymakers are also divided over the bond purchase programme amid improving economic outlook and decreasing Covid-19 cases. Coming up, ZEW survey - Economic Sentiment is due later today, which will provide insights over the morale condition in the bloc, alongside key Gross Domestic Product figures and Employment change, which will be crucial for the market, as well as for tapering expectations.


The British Pound holds firm against the dollar amid a risk-on shift in investors appetite and Bank of England officials speaking later today. The greenback has sustained significant pressure after the latest job reports in the U.S. showed that the global economy is at risk of a significant slowdown, alongside Chinese views following the latest strike of the Delta variant. Amid fears from policymakers, and an urge to incentivize the economy, Fed officials are expected to extend their stimulus deployment while the PBoC is likely to increase stimulus spending. However, the U.K. data showed last Friday that the construction sector grew last month at it’s weakest pace since the beginning of lockdown, hit by a severe shortage in building supplies. The data reveals Britons' concerns not only over Covid lockdown but for Brexit and other global supply chain issues which are bringing their toll. As part of the ongoing shortages, inflation is expected to sustain high levels and we expect MPC member  Saunders to speak later today advocating for tapering their asset purchase facility. 


The Japanese Yen retraced 0.18% during yesterday's trading session amid a broader risk-on mood weighing on the risk haven appeal of Japan’s currency. Market participants continue to pile up bets of policymakers sustaining stimulus in western economies while a reduction in reserves requirements is expected from the PBoC to ease monetary conditions. Asian stocks edge higher amid the risk-on mood which has pulled back the JPY. However, the pair continues to oscillate within a 3-week tight range amid the broader political instability and complication around the control of the virus. Moreover, consolidating U.S. treasury yields keep the Yen subdued and it is likely to sustain amid the risk-on mood shift on investors confidence. Datawise, yesterday’s releases failed to impress, which removed support from the Yen as Overall Household Spending posted 0.7% annualized, while market participants expected 2.9%.  


The Loonie recorded mild losses during yesterday's trading session, as the dollar attempted a bounce back amid rising U.S. treasury yields. However, the risk-on mood keeps markets confident that policymakers will sustain current levels of stimulus to assure participants of favourable market conditions. Tomorrow, the Bank of Canada will keep Canadian investors on the edge of their seats, as we expect their Interest Rate decision and monetary policy statement. The BoC is expected to announce a hawkish hold of their current stimulus programme, following the poor Gross Domestic Product figures released last Tuesday where the economy contracted 1.1% instead of growing 2.5% as participants expected.  


The Mexican Peso lost 0.18% against the dollar amid treasury yields consolidating and a broader risk-on environment derived from broader optimism around Covid and stimulus in the economy. The U.S. government announced the renewal of High Economic Dialogue with Mexico, a dialogue space set up under the Obama administration, with the intent of advancing economic and commercial strategies which are central to the promotion of mutual economic growth between the two countries. This space serves to reinforce the bilateral relationship between the two countries on a full range of issues, which now includes the recovery from the Coronavirus pandemic and climate change. 


The Chinese Renminbi retraced 0.06% amid U.S. treasuries dropping, improving the attractiveness of their yields. However, China's government bond futures fell for the fourth day after a surprise jump in the nation's exports, undercutting the case for more policy easing. Moreover, the official reserve assets of China rose by USD 37.1 billion, or 1.1% from the previous month, reaching a total USD 3.23 trillion in aggregate reserves. Later on this week, market participants will be tuned to inflation reports, where we are expecting the Consumer Price Index to post 1% annualized while the Producer Price Index is anticipated at 9% annualized.  


The Brazilian Real advanced against the dollar, recording 0.39% gains during yesterday's trading session amid broader risk-on sentiment which keeps risk appetite on the front foot. Moreover, Brazil’s agriculture ministry confirmed two atypical cases of BSE, commonly known as “mad cow” disease, have been identified at meat-packing plants in two states of Brazil. Authorities informed the World Organization for Animal Health while stressing that trade should not be impacted and that Brazil is expected to keep status as a country with negligible risk of BSE, and that atypical cases have lower risks than traditional types. However, the Chinese government has temporarily suspended it until authorities conclude a review of the situation. China is the main buyer of Brazilian beef, with exports totaling a record of USD 3.1 billion so far in 2021. 


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