The Chinese central bank sets the yuan at its weakest point since 2008 while the US and the United Kingdom remain closed on a public holiday
The euro opens the week at least one percentage point weaker compared to recent highs, before a week that could be decisive for the single currency. Next Wednesday, the European Commission will present a proposal for a community recovery fund in the face of the crisis, after Ursula von der Leyen accommodated expectations about a previously “ambitious” plan. The proposal should be aligned with the recent Franco-German initiative, focused on guarantees of up to € 500 billion financed through the community budget and distributed according to the needs of member states to face the crisis.
However, the initial optimism generated by this proposal was tempered over the weekend, after the so-called “frugal countries” – Austria, the Netherlands, Sweden and Denmark – presented a counterproposal based mainly on the delivery of loans instead of backed funds . The resistance offered by the most conservative countries in the area to the shared debt plan in the region weakens the prospects for the euro, which is already beginning to be discounted from the action of the spot and futures markets. This week’s debate will be decisive for the direction of the single currency in the coming months.
The DXY dollar index opens a third consecutive session of gains against its major peers, on a day when local markets will remain closed on national holidays. The recent tone of tensions between the USA and China has regained ground in favor of the greenback in a trend that seems to be taking off more vigorously. China’s central bank set the weakest yuan against the dollar since 2008 since 2008, a move that has previously been singled out as an act of currency “manipulation”. Although the direction of the reference rate aligns with market pressure following the fall in Asian stocks due to the riots in Hong Kong over the weekend, the brand reflects a possible downward bias in relation to estimates based on the balance of supply and demand.
This action could add to the list of growing tensions between the two powers and consolidate the strength of the dollar as a consequence. Meanwhile, investors will continue to monitor the release of new unemployment data next Thursday, waiting for the weekly increase to continue to slow down. The economic growth figure for the first quarter of the year will be reviewed that same day, as the markets position themselves for a presentation by Jerome Powell next Friday.
The British pound begins a week in relative tranquility due to the closure of local markets on a public holiday. Despite the short week, however, the currency will be exposed to intense activity in the coming days. On Wednesday, British representatives will report to parliament on the progress of the Brexit talks, on the eve of the fourth and final round of talks with the European Union. Faced with the imminent approach of the deadline for the establishment of a possible divorce agreement, the Brexit issue will resume prominence in the coming days. Meanwhile, the finance minister faces a difficult decision this week, when the de-escalation of employment support measures that have overloaded the fiscal budget for the year should begin. After the forceful initiative to cover 80% of the wages of 8 million workers in the strictest period of confinement – valued at around 84 billion pounds – an early reduction in aid could boost the level of domestic unemployment to figures record since the 1930s.
The Mexican peso spun five sessions of consecutive gains against the dollar last week, and this morning it appears slightly immune to the depreciation of the Chinese yuan that generally marks the pulse of the emerging currency basket. After losing more than a quarter of its value in the hectic months of the market during the global outbreak of the pandemic, the peso gradually recovers its usual rhythm in a more relaxed operation. Despite markedly pessimistic economic forecasts for the Mexican economy as a result of the pandemic, the evolution of inflation offered support to the currency at the end of the previous week. In the first fortnight of May, the third month of the health emergency, the annual inflation figure reversed its decreasing trend, standing at 2.83% from 2.21% previously. The indicator exceeded expectations of 2.51%, closer to the center of Banxico’s target range of 3%.
The turn in domestic inflationary dynamics has been widely anticipated by Banxico, supporting the cautious stance of monetary policy. Investors will follow this data closely to gauge their expectations of upcoming interest rate movements, still among the highest in the market. The central bank will publish the quarterly inflation report next Wednesday, while the minutes of the last Banxico meeting will be released the following Thursday.