Daily Market Pulse

Tracking the pullback in Treasury yields


The U.S. dollar inched down 0.37% to a two-week low against a basket of major currencies, tracking the pullback in Treasury yields. Soft labor market numbers underscored the latest Fed minutes that emphasized how the economy was far from what the Fed considers to be healthy. The number of Americans filing new claims for unemployment benefits increased by a seasonally adjusted 16K last week to 744K, well above market expectations (680K). On the economic data front, the Producer Price Index for March is today’s highlight, where market participants will be waiting for a 3.8% year-over-year increase, driven by a resurgence in demand and higher commodity prices. The number should feed inflationary pressure and push yields up.


Following a technical picture, the single currency regained its footing on Thursday and popped back above its 200-day moving average. Regarding macro fundamentals, the EUR continues to receive support from the Europe Central Bank (ECB), interest rate, and a bullish stock market. Minutes of the March 10-11 ECB meeting suggested the possibility of reducing bond purchases despite the need for maintaining ample monetary stimulus. Meanwhile, France revealed it will pledge to keep tax unchanged and will limit annual spending increases as it seeks to repair the fiscal damage from the pandemic. Today, Germany will release its industrial production numbers, along with import and export figures for February.


The British Pound managed to be flat against the dollar on Thursday, stanching its losses after the U.K. Construction PMI reported that the recovery in construction output gained considerable momentum in March, supported by robust rises in house building, commercial work, and civil engineering. The index came at 61.7 last month, a sharp increase from 53.3 in February. On the political front, Chancellor of the Exchequer Rishi Sunak is facing fresh demands for an inquiry into his conduct, after former Prime Minister David Cameron sent messages to the chancellor's private phone last year to ask for help for finance firm Greensill Capital, where he worked as an adviser. Looking ahead, the Bank of England will release its Quarterly Bulletin, which may bring fresh commentary on market developments and U.K monetary policy operations.  


The Japanese yen rose 0.53% against the greenback, with the currency continuing to track the pullback in the U.S. Treasury yields. The benchmark 10-year bond yield extended its pullback at 1.6333% from recent peaks as market players digested the U.S. Fed’s vow to stay the course with its dovish stance. On the economic front, market participants continue to digest recent data from the Bank of Japan which showed that Japanese households’ inflation expectations rose in March from three months ago and their confidence in the economic outlook improved to an eight-year high - a sign that the initial pain from the coronavirus pandemic was heeling. 


Yesterday, the Loonie strengthened 0.38% and erased previous losses against the U.S. dollar, despite Ontario, Canada's most populous province, initiating a four-week stay-at-home order as it battles a third wave of the Covid-19 pandemic. On the other hand, stable oil prices helped the commodity-linked CAD. Looking ahead, Canada's employment report for March is due today and may offer clues for the Bank of Canada's (BoC) policy outlook. The BoC has also become more optimistic about prospects for economic growth, with market participants raising expectations for it to cut bond purchases at its next interest rate announcement on April 21.


Dovish signals from the U.S. Federal Reserved weakened the dollar and pushed up the Latin American currencies, including the Mexican Peso. The MXN rose 0.60% as U.S. policy-makers seem to be in no hurry to tighten monetary policy, at least in the short term. The MXN also saw some support from the recent inflation data. Consumer prices rose 4.67% in the year through March due to an increase in fuel prices and landed above the central bank’s target range. On that note, the central bank is likely to look through this and keep its policy rate at 4.00% over the coming months. Today, investors will wait for industrial production in February.


The Chinese yuan slid 0.13% against the greenback on Thursday after worries over deteriorating Sino-U.S. ties following the addition of seven Chinese supercomputing entities to a U.S. economic blacklist for assisting Chinese military efforts. Also, Italy's Prime Minister Mario Draghi revealed that his government recently blocked a Chinese takeover of an unnamed semiconductor company. On the economic front, the Consumer Price Index rose 0.4% year-over-year in March, after falling 0.2% in February, and the Producer Price Index picked up to 4.4% in March, from 1.7% in February. Higher commodities and energy prices were the main drivers. On that note, China’s Central Bank may revisit its interest rate by the end of the year if prices continue to move up. In general, the CNY may remain under pressure due to geopolitics, but a further retract in the U.S. yields could offset part of this bearish trend.


BRL bulls regained their footing on Thursday after the currency rose 0.81% against the U.S. dollar even as Covid-19 infections and deaths soared. However, international headlines, with the U.S. Federal Reserve meeting minutes showing that the bank was in no hurry to tighten monetary policy, provided important support for emerging market currencies. In general, on the domestic front, investors are cautious as President Bolsonaro considers a potential intervention in Petrobras' fuel pricing policy, which could generate losses for the state-run company and reinforce his populism’s tone. The monthly inflation data (IPCA) highlights today’s calendar. The data will offer extra fuel for hawkish Brazil’s Central Bank. 


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