The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, advanced 0.23% during yesterday’s trading session amid a cautious market mood ahead of key U.S. inflation reports on Wednesday. Equity indexes retraced yesterday with S&P 500 falling 0.69% and Dow Jones falling 0.72% on Monday. In addition to Friday’s disappointing job reports, renewed concerns over Chinese real-estate developers failing to make payments also seem to loom the market mood. Investors remain invested in the greenback amid expectations for a tapering of the Federal Reserve stimulus that could begin as soon as November and a possible interest rate hike in late 2022. Today, except for expected speeches from Fed officials Clarida and Bostic, it will be a relatively quiet day in the absence of high-impact macroeconomic data releases, leaving risk perception to be the main driver of market movement.
The common currency attempted a bounce back from year-to-date lows, closing the trading session relatively unchanged against the dollar amid broader market cautiousness ahead of key inflation data in the U.S. and rising energy prices globally. The European Central Bank’s (ECB) Philip Lane shrugged off the recent bout of inflation as a trigger for monetary policy. Additionally, ECB governing Council member Yannis Stournaras dismissed the theory of rising energy prices and ultimate rate hikes in the near future due to higher inflation. The dovish outlook from European policymakers, while Fed and Bank of England signals at probable rate hikes, weigh on the Euro.
The British Pound failed to capitalize solid gains against the dollar after U.K. job reports showed the unemployment rate dropped from 4.6% to 4.5% in September. The employment readings also showed that the U.K. claimant count change, which shows people claiming jobless benefits, dropped to 51.1k in September compared to 58.6 shown in August, while wages arrived at 6% in the last three months. The positive reading underpinned Sterling, although due to Brexit frictions and the recent petrol crisis, cable remained subdued with limited potential in the short term.
The Japanese Yen slumped 1.18% against the dollar during Monday’s trading session as one of the worst-performing currencies when benchmarked against the greenback. The Yen dropped to a three-year low, with several analysts suggesting that the pair could continue extending the current movement. Japanese consumers and corporations tend to believe the domestic economy does much better with a weaker Yen, so personal consumption should rebound faster than expected, while corporate spending should pick up too. Interestingly enough, Japanese shares were among the biggest gainers on Monday, suggesting that a weaker Yen typically coincided with higher equities.
The Canadian Dollar sustained pressure over the dollar as it attempts to extend gains amid bolstering energy prices hitting seven-year highs. The West Texas intermediate, a major Canadian export, takes a breather from its seven-year high at USD 82 per barrel, which has provided enough fuel for the loonie to consolidate gains against the greenback. Additionally, the upbeat job reports in Canada reported 157k new jobs in September and supported the prospect of another cut in the Bank of Canada’s asset-buying scheme.
MXN – The Mexican Peso extended losses against the dollar, closing 0.72% lower during the Monday trading session amid a broader risk of sentiment weighing on emerging markets. The Mexican Peso has been under severe pressure, marking the fourth consecutive week the currency has depreciated, pointing at persistent inflation as the main driver. Additionally, the recent government policies such as the electricity reform were perceived as market unfriendly, weighing on the demand for MXN.
The Chinese Yuan retraces against the greenback amid a broader risk-off mood and flooding in Shanxi province intensifying the energy crisis in the country. The price of coal used in China’s power plants has surged to a new record high, as another of the country’s key mining regions is hit by flooding. The Shanxi province is the biggest coal-producing province in China, which has left supply on the crossroad, with Thermal coal on the Zhengzhou Commodity Exchange rising over 10% on Tuesday. The floods further complicate China’s efforts to increase fuel supplies to ease its deepening energy crisis.
The Brazilian Real continues to depreciate against the greenback, edging 0.53% lower amid a broader risk-off mood weighing over Emerging markets. However, sustained inflation weighs on the Real, especially as inflation reaches double digits. September reports showed that monthly inflation reached 1.16%, which brought headline inflation to 10.25%, up from 9.68% reported in August. Authorities flagged that inflation was driven by housing, transport, and food and drinks categories, which saw monthly inflation of 2.56%, 1.82%, and 1.02% respectively. Additionally, electricity prices soared 6.47% amid drought and frosts earlier in the year.