Daily Market Pulse

Dollar surges to 10-day highs


Following a three-day weekend, U.S. bond markets resumed today, and the 10-year treasury yield surged near 4%, boosting the U.S. dollar early Tuesday. Furthermore, the risk-averse market environment underpins the greenback to trade at its highest level in more than ten days. A stronger-than-expected U.S. employment report on Friday reinforced the belief that the Fed will continue to hike interest rates rapidly, while markets await U.S. inflation data on Thursday for confirmation. With the IMF and World Bank warning about mounting chances of a slowdown, increased geopolitical tensions and global economic worries fueled safe-haven demand for the dollar. The sentiment of the market is anticipated to continue to impact major currency pairs. Investors will also pay attention to central bankers' remarks.


The Euro fell 0.43% on Monday amid reports that German officials had rejected the notion of a common EU debt to address the eurozone's energy issue. Coming to today, the common currency is falling this morning as a result of the market's risk aversion. Meanwhile, prospects of a recession in the Eurozone make tightening monetary policy more difficult for the ECB. Markets now expect the ECB to raise rates in substantial chunks at its October and December meetings, but the rate-hike cycle may decelerate next year. Also, the newest economic figures reveal that retail sales in the EU declined for the third consecutive month in August, and revised PMIs suggest that GDP is decreasing, with the rate of decrease accelerating in the third quarter.


The British Pound continued to fall on Tuesday morning after ending 0.28% down, pushed by a stronger dollar and speculators dismissing the Bank of England's latest intervention in the bond market. The central bank stated on Tuesday that it would expand the scope of its daily gilt purchase operations to include purchases of inflation-linked gilts. The steps are intended to enhance market functioning and help to an orderly conclusion of the government's gilt purchase plan on October 14th. Elsewhere, earlier in the day, the UK's Office for National Statistics stated that the ILO Unemployment Rate fell to 3.5% in the three months to August from 3.6%.


The Japanese Yen fell against the U.S. dollar today, closing in on a 24-year low. The Yen has progressively depreciated this year as the Bank of Japan committed to ultra-easy policies to maintain a weak economy, while the U.S. Federal Reserve aggressively hiked interest rates to battle growing inflation. Meanwhile, Japan's current account surplus fell to a record low in August, further pushing the Yen down. In other news, the Economy Watchers' Survey indicated that the measure for Japan's service sector morale improved by 2.9 points from the previous month to 48.4 in September 2022, while the economic outlook index fell 0.2 points to 49.2 in September, owing to concerns over significant cost pressures.


The Canadian currency is continuing its decline after gaining 0.29% yesterday amid the risk-off mood. Following the release of new economic statistics, investors continued to examine the rate of incoming monetary tightening by major central banks. Domestically, the unemployment rate unexpectedly declined by 0.2% point to 5.2%, and employment change was positive for the first time in three months, encouraging hopes that the Bank of Canada will maintain its aggressive monetary policy.


The Mexican Peso climbed for a second day Yesterday (0.36% higher) as Latin American peers advanced amid rising commodity prices. With the U.S. interest rate markets closed on Monday, Mexican swaps are barely altered. The TIIE curve anticipates less than 120bps more rate rises in the remainder of 2022, bringing the policy rate to slightly under 10.50%. Meanwhile, two Banxico meetings are planned before the end of the year, in November and December. The important local stimulus this week is the Banxico meeting minutes, which is expected on Thursday.


The Yuan fell against the dollar, threatening to fall to fresh record lows amid a recurrence of Covid-19 cases, heightened geopolitical tensions, and a deteriorating economic outlook. Fears that mounting virus instances will lead authorities to implement more lockdowns, as well as new limits on China's access to U.S. semiconductor technology, impacted the sentiments. The Yuan also fell despite Beijing's efforts to keep it from falling further, with the central bank recently instructing state-owned banks to support the currency in offshore markets and enacting a slew of measures to prevent currency speculation. Meanwhile, economists warned against placing aggressive wagers on future yuan falls, speculating that President Xi Jinping may begin his third term by arguing for a new Covid management approach following the Communist Party Congress.


On Monday, the Brazilian Real gained 0.24% versus the U.S. dollar. Markets are  watching for a possible fresh rate rise in the United States after statistics released last week indicated that the country's job market is still strong. Locally, financial market experts have cut their inflation forecast for this year from 5.74% to 5.71%. It was the 15th decline, followed by the inflation projection for 2022. They also kept the Selic, the economy's basic interest rate, at 13.75% each year until the end of 2022. Investors are also keeping an eye on election events as the race for the second round between Bolsonaro and Lula tightens.


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