Daily Market Pulse

Investors continue to take stock of the risks ahead


The Dollar Index, which tracks the USD against a basket of other major currencies was up around 0.2% on Tuesday, its second day straight of gains. Investors continue to take stock of the risks ahead of Brexit trade talks between the U.K. and the EU, as well as the U.S. Congress’ debate over the latest Covid-19 stimulus measures. In Washington, Treasury Secretary Steven Mnuchin presented a new $916 billion Covid-19 relief proposal to House Speaker Nancy Pelosi, in the first move by the Trump administration since the election, breaking a months-long standoff. Turning to data, it is a busy day with October’s JOLTS job openings, Wholesale Inventories, and MBA Mortgage Applications reports. However, none of them are expected to have a substantial impact on the trading session.


As a result of an uncertain situation as to the European relief package and mixed macroeconomic data, the EUR fell 0.06% against the greenback on Tuesday. German investor sentiment jumped more than expected in December on expectations that Covid-19 vaccines will boost the outlook for Europe’s largest economy, the ZEW economic research institute said, while on an annual basis, the seasonally adjusted GDP declined by 4.3% in the Eurozone and by 4.2% in the EU compared to the third quarter of 2019. Meanwhile, Poland and Hungary could reach a compromise, but the deal on the EU budget that limits a proposed rule of law mechanism needs to be modified, according to Poland’s foreign minister. The issue is set to be discussed at an EU summit on Thursday.


The latest development on Brexit negotiations came in yesterday when the U.K. announced it will abandon all the Brexit clauses concerning Northern Ireland operating in the internal market and finance legislative bills. This means that the parts of the Internal Market Bill which break international law, and similar clauses in the Taxation Bill, will now be removed. Although the pound reacted positively to the aforementioned agreement, it inched down 0.17% against the USD amid a choppy session. The Brexit situation will, once again, be the main center of attention today, with the PM Johnson heading to Brussels this evening, for face-to-face talks with EU Commission President Ursula von der Leyen.


The Japanese yen lost some ground gained against the USD the day before, closing 0.09% down on Tuesday. Today, the JPY should react to the positive news from the industry sector. Japan’s core machinery orders rebounded sharply 17.1% from the previous month’s drop in October, the government said earlier this morning, in an optimistic sign for an economic recovery emerging from a deep Covid-19 slump. Also, investors are still digesting the new stimulus package $708bn worth announced yesterday by Prime Minister Suga, aiming to develop new opportunities for growth like green and digital areas.


The CAD dropped slightly (-0.14%) against the USD on Tuesday for the second trading session in a row after worries about fragile oil-prices, firm U.S-treasury-yields, and the pandemic attracted bearish pressure. Today’s Bank of Canada (BoC) meeting will be a major event to look forward to this week. Although the interest rate is expected to stay unchanged at 0.25%, investors and traders will focus on the Bank’s commentary. The key item to watch for in the statement is whether the BoC opt to mention the CAD’s appreciation as a potential drag on growth and its views on additional ways to support the economy.


The MXN appreciated 0.46% against the greenback on Tuesday, reaching its strongest level not seen since March 5. The peso’s leap is due to the recent central bank’s announcement saying that it would hold two-dollar auctions totaling $3bn using its swap line with the Fed, in an attempt to boost liquidity. The Central Bank also released figures on its foreign exchange reserves, which totaled US$194,359 million last week, reflecting the export performance improvement. Today, inflation data will be an interesting release to watch as the economic activity progresses.


The Chinese yuan once again was unchanged against the USD on Tuesday. Earlier this morning, China reported consumer deflation for the first time in 11 years. China’s official consumer price index (CPI) fell to -0.5% in November from a year earlier, down from 0.5% growth in October, while the producer price index (PPI) contracted 1.5% year-on-year. However, the data is not concerned as most of the decline was the result of a drop in food price inflation. Pork prices fell 6.5% month on month thanks to a strong rebound in pig stocks in recent months. The U.S.-China friction should weigh on the CNY after the U.S. blacklisted several Chinese companies for allegedly helping North Korea export its coal, part of a renewed effort by the Trump administration to stem critical revenue sources for Kim Jong-un’s regime.


The Brazilian real slid 0.42% against the greenback on Tuesday after alarming inflation data and ahead of a central bank meeting this afternoon. Inflation in November stood at 0.89%, pulled by the spike in food (+6% meat and +30% potato) and fuel (+1.64%) prices. According to the government’s statistics agency IBGE, this is the highest result for November since 2015, when the indicator reached 1.01%. Moreover, for 12 months, the inflation stood at 4.31%, topping the central bank's official year-end target, lending weight to expectations that the tightening cycle will begin next year and earlier than thought. On that note, Brazil’s central bank will probably hold its key interest rate at a record low of 2% in its last meeting of the year, albeit the recent inflation data should encourage further discussions.


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