Daily Market Pulse

Dollar collapses amid relief on inflation readings

6 minute read


Positive inflation results underpin optimism among market participants. The U.S. Dollar index a major indicator that benchmarks the performance of the greenback against six major currencies fell sharply after the softer inflation readings, closing 1.87% lower yesterday and continuing to edge 1.28% lower during early hours of Friday. The U.S. Consumer Price Index declined to 7.7% in October, pulling back from 8.2% registered in September, while Core readings fell to 6.3% from 6.6% in the same period. The lower than expected results provide relief to market participants as policymakers won’t need to hike another 75 bps in December, instead a 50 bps adjustment jumped to 80% probability from 50% earlier this week. In turn, major equity indexes in the U.S. registered impressive gains while treasury yields declined towards 3.8%. Later on the day the U.S. economic docket will feature University of Michigan Consumer Sentiment Index while investors will keep an eye on central bank speakers ahead of the weekend.


The Euro registered an impressive recovery amid softer inflation readings in the U.S., advancing 1.98% on Thursday and extending another 1.02% during early hours of Friday. Optimism across global markets underpin riskier assets as China also announced that they have decided to move away from its zero covid approach which has kept supply chains globally on check. Chinese authorities reduced quarantine times for travelers and people who had close contact with Covid cases. The EUR consolidates momentum above parity against the dollar supported by a hawkish European Central bank and a higher probability of a cease fire in Ukraine. 


The British Pound capitalized strong gains against the greenback, closing 3.15% higher on Thursday and continues to edge 0.52% higher on Friday. The U.K.’s office for National Statistics announced on early Friday that the British economy grew 2.4% annualized in the third quarter, 3 bps higher than the 2.1% previously anticipated. Other data from the U.K. showed that Industrial production also surprised on the upside, expanding 0.2% on a monthly basis. The overall positive mood in global markets keeps providing support for cable to recover further.


The Japanese Yen reached its highest level in 7 weeks following the softer than expected inflation readings in the United States. On Thursday, the Japanese currency rallied 3.89% against the dollar and continues to extend gains on Friday. Market participants have expressed that signs have emerged for a change in the Yen weakness trend although is difficult to conclude, charts suggest that the depreciation cycle is over. Finance minister Shunichi Suzuki kept the door open for intervention on Friday, latching onto lack of US criticism in its latest currency report as evidence there was no problem with Japan’s strategy.


Most major and EM currencies strengthened on Thursday after a softer US CPI reading. The Loonie also received support from Governador Tiff Macklem's remarks, who mentioned that the Bank of Canada could deliver another outside increase to interest rates. As a result, the Loonie jumped as much as 1.49% against its US counterpart. This morning crude prices are hovering around a 3% high, amid news that China the largest oil importer, eased some of the strict Covid measures. This fresh news underpins the CAD, which might close the week in the green territory. Given the absence of relevant economic data, traders are looking forward to the US economic docket later today.


The Mexican peso saw some strong gains (+1,33%) against the dollar yesterday, with investors digesting the latest US consumer price levels which came lower than the forecast, giving the Fed room to moderate its pace of rate hikes. The MXN’s move was the strongest since the Covid pandemic rattled markets, which illustrates how Banxico's aggressive interest rate hikes are supporting the MXN. Moreover, it seems to be a consensus in the market that the Peso is the favorite among currency investors. Later today, the Central Bank is likely to deliver a fourth straight interest-rate increase of 75 basis points. That said, the MXN might not strongly react and it is already priced in.


Yesterday was marked by some important steps by China to ease its Covid restrictions. As a result, the CNY closed 0.75% up against the greenback, but, further CNY gains were capped as authorities mentioned that the new measures aren’t the end of Covid zero policy. Nonetheless, market players are expecting Chinese authorities and policymakers to take more steps to ease Covid rules in the coming months, because frequent curbs and the risk of full-scale lockdowns put major constraints on spending, investment, travel, sentiment, and economic growth. Looking forward, investors and traders are looking forward to the upcoming G-20 talks between presidents Xi and Biden, as the event will offer an opportunity for investors to assess the outlook for China-US talks.


 Yesterday, investors reacted negatively to Lula’s remarks, with the newer president saying that the new economic team is seeking a waiver to spend 175-200 billion reais beyond what is allowed by Brazil’s spending cap rule. Also, there are huge uncertainties about who will be the new Finance Minister. Local media continues to report that the former Sao Paulo mayor Fernando Haddad will occupy the chair. Against this backdrop, the Brazilian Real slumped as much as 3.53% against the USD. Moreover, the IPCA index which measures price levels in the country rose 0.59% in October from the previous month, above the forecast. The annual inflation eased to 6.47%. There is no relevant data today, thus market players will be monitoring Lula's remarks and his government transition plans.


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