Daily Market Pulse

Dollar weak near seven-month low


The dollar remained weak versus a basket of major currencies on Friday, touching the 102 area for the first time since last June, as expectations of a less aggressive Fed tightening frightened investors away from the currency. The annual inflation rate in the United States dropped for the sixth consecutive month in December, to 6.5%, in line with market expectations. This was also the lowest level since October 2021, suggesting that inflation peaked at 9.1% in June. After delivering a half-percentage point increase in December, money markets now price in a more than 90% chance that the central bank would downshift to a smaller 25 basis point rate hike in February. The DXY plummeted over 1.5% this week, the most significant weekly drop since early November.


Following Thursday's remarkable surge (0.89%), the Euro reached its highest level since April early Friday before falling slightly. The gain is being fueled by a weaker dollar, as investors expect the Fed to decrease the pace of rate hikes following the release of a weak U.S. CPI report. Meanwhile, preliminary estimates show that European pricing pressures reduced more than predicted, with the Eurozone's annual inflation rate falling to a four-month low. However, without energy, inflation remains at historic highs. The final data is due the following week. In other news, industrial production in the Eurozone increased by 1% month on month in November 2022, rebounding from a downwardly revised 1.9% drop in October and surpassing market expectations of a 0.5% increase. It is the industrial sector's most robust performance in three months.


As markets digested comments from a Bank of England policymaker and welcomed upbeat data, the British Pound maintained near its best level since December 14th. The British economy expanded by 0.1% in November, owing to an increase in consumer-facing services. The estimate exceeded market expectations of a 0.2% drop, lowering the likelihood of the UK entering a technical recession in the fourth quarter of 2022. Despite the upbeat data, the Sterling struggles to sustain its bullish momentum.  On the monetary policy front, following nine straight rate hikes, the Bank of England is expected to raise interest rates to 4% next month. Markets are divided on how much further rates will rise after that, with the bank rate expected to peak at roughly 4.5% by the middle of this year.


The Japanese Yen rose to its highest level in over seven months before falling during the day. This comes on the heels of statistics showing that U.S. inflation fell further in December, supporting expectations for a less aggressive Fed tightening. The Yen was also boosted by increased speculation about the Bank of Japan's potential shift away from the ultra-easy policy after unexpectedly doubling the tolerance range on 10-year JGBs in December. Predictions of a policy move will likely be fed by the upcoming BOJ meeting, expectations of upward revisions to the bank's inflation projection, and the announcement of a new BOJ governor. Markets are speculating on whether the BOJ will raise the yield cap on 10-year JGBs again at its next meeting, while analysts believe the BOJ still has the firepower to defend its target.


During the early half of the European session, the Loonie was at its highest since November 25. Crude oil prices are trading around a one-and-a-half-week high as traders anticipate that China's shift away from its zero Covid policy will boost fuel consumption. This, together with the pervasive U.S. dollar selling bias, is underpinning the Loonie. Indeed, markets appear to be confident that the Fed will decrease the pace of its rate hikes even further and deliver a lower 25 basis point increase in February. This, in turn, keeps the U.S Treasury bond yields near a multi-week low, weighing on the safe-haven greenback.


On Thursday, the Mexican Peso gave up earlier gains that had brought it to a new 2023 despite U.S. data confirming declining inflation in December. Fed-dated OIS futures are leaning toward a 25bps rise in February after U.S. inflation statistics, and Philadelphia Fed President Harker's comments favor a quarter-point increase. Swaps show cumulative rate rises of fewer than 50 basis points for February and March. Mexican swap rates fell across the board on Thursday, tracking lower U.S. Treasury yields as financial markets repriced the Fed's rate path; the curve prices less than 50 basis points of rise, bringing the policy rate to just under 11%. In today’s session, Peso drifted lower and is down 0.19% for the day.


Following the disappointing export figures, the Chinese Yuan has dropped 0.24% in today’s session. Investors analyzed statistics revealing that China's exports and imports fell in December due to tumbling demand. Exports from China fell 9.9% year on year to USD 306.08 billion in December 2022, closely in line with market expectations of a 10% drop following a revised 8.9% drop a month earlier. This was the most significant drop in exports since January-February 2020, as global demand cooled due to stubbornly high prices and rising borrowing costs. Markets were also kept on edge by rumors that China intends to buy "golden shares" in Alibaba and Tencent's local subsidiaries.


The Real is trading at a low on Friday following the release of economic measures by Finance Minister Fernando Haddad to control public accounts. The major measures of the Lula government's head of the economic region are to enhance tax collection to close the fiscal gap. Furthermore, the Central Bank announced on Friday that the Economic Activity Index (IBC-BR), which is regarded as a "preview" of the Gross Domestic Product (GDP), fell by 0.55% in November, marking the fourth consecutive month of reduction in the level of activity in the Brazilian economy. Elsewhere, weak inflation data from the United States reverberates among investors worldwide. If the pace of interest rate hikes in the United States slows, Real may benefit.


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