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Powell pulls dollar back after hike hints

5 minute read


The U.S. dollar index, a common tool used to assess the performance of the greenback against a basket of six major currencies, retraces moderately (0.12%) as investors remain uncertain ahead of key economic releases a quiet last day of the month in financial markets. The U.S. Stock futures trade virtually unchanged suggesting a broader risk-neutral environment across market participants. Today the U.S. economic docket will feature ADP employment figures as well as Gross Domestic Product readings and the Federal Reserve’s Beige Book will be posted throughout the day.


The Euro trades within a tight range edging moderately higher during the early hours of the trading session. However, economists have witnessed a rising correlation between the European stock market and the currency now that the Euro is strengthening once again. The Euro has rallied about 8% since a trough on Sep 27, around the same time the Euro Stoxx 50 also found its bottom and proceeded to gain more than 20%. The cheaper Eur and discounted stock market resulted in an appealing opportunity for USD-based investors which has reflected an improvement in sentiment and economic outlook. Moreover, the Harmonized Index of Consumer Prices was released lower than expected at 10% vs 10.4% previously anticipated and 10.6% previously released. These results provide relief as this allows central bankers to remove some pressure to tighten monetary policy too aggressively and that inflation may have peaked.


As markets remain relatively calm on this last day of November, the Sterling follows a similar pattern edging marginally higher (0.35%) during the early hours of the trading session. However, the pound seems to have found support after Tuesday’s intervention from the Bank of England Governor Andrew Bailey where he acknowledged that the U.K. labor market has turned out to be much more constrained than they initially thought. Recently the British economic outlook remains very cloudy although there has been a significant recovery in the currency since its lows in September.


The Japanese Yen is trapped within a tight range amid broader market uncertainty and investor cautiousness ahead of December. Data from Japan revealed that Industrial Production decreased by 2.6% in October following September’s 1.7% decline. A shortage in industrial output could have repercussions on Japanese inflation which has previously shown signs of increasing and investors keep a close eye on it. However, despite the broader market uncertainty, the Yen is set to close out its best-performing month in more than six years amid expectations the Federal Reserve will slow the pace of interest rate hikes.


Surprisingly, the Loonie slid more than 0.6% against the dollar, failing by the most in more than a month, amid downbeat domestic figures. The CAD was under pressure by signs that the Canadian economy is becoming weak. The recent data triggered investors to drastically rethink the overall outlook. Furthermore, yesterday news that British Bank HSBC plans to sell its Canadian unit to Toronto-based Royal Bank of Canada, also came to traders´ attention as the transaction could potentially spur outflows. Looking ahead, West Texas Intermediate crude oil prices, hover at $80 a barrel, amid an unconfirmed report that OPEC+ will hold in place its current oil output policy rather than potentially trimming supply further.


Similar to other currency peers in the region, the Mexico peso also closed in the green territory on Tuesday. The peso jumped 0.37%, reaching its strongest level since March 2020. The MXN´s move was on the back of optimism outlook toward China, which might ease Covid restrictions given the recent manifestations across the country. Investors have ratified that the Mexican Peso is preferred compared to the Brazilian Real, given its high-interest rate and low volatility - the USDMXN 30-day implied volatility is at 11%, compared with more than 18% for BRL. Thus, carry trade strategies boost the demand for the peso and provide an interesting support to the currency. Later today, Mexican Central Bank releases inflation report for October.


The Chinese Yuan gained 0.66% against the greenback on Tuesday, reflecting the upside mood of the international market. The currency continued to extend gains Wednesday on speculations over reopening after intense pressure from the population and new hopes for a further relaxation of Covid curbs. However, the recent protests across major Chinese cities led the 30-day actual volatility to spike to its highest level since inception. Looking forward, fresh government announcements claiming that Beijing would bolster vaccination among its senior citizens, bring some relief to the USDCNY pair.


Yesterday, the Brazilian real outperformed its LatAm peers. The currency jumped as much as 1.54% against the USD, on the back of a global risk-on sentiment that is weighing the dollar. It seems to be a consensus among market players that former São Paulo mayor, Fernando Haddad, will be the next finance minister. On that note, it might be already priced in and an official announcement is likely to have a limited impact on markets. Regarding the fiscal responsibility narrative, President-elect Lula sent a bill to congress on Monday that would exempt almost 200 billion BRL in social spending from a spending cap rule for Lula´s entire mandate. Looking ahead, the market will continue to price the bill´s developments in Congress, as well as keep an eye on the National Unemployment rate and Net Debt % GDP figures, both set to be published today.


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