The U.S. dollar index used to value the greenback against a basket of six major currencies, edged 0.15% higher during yesterday’s trading session amid a broader risk-averse mood and cautiousness ahead of upcoming inflation reports. Today, the greenback retraces, erasing yesterday’s gains amid U.S. treasury yields falling back 3.5%, removing support from the greenback hours before the all-important inflation readings. The Consumer Price Index is expected to remain at 5.3% annualized, while the core inflation reading is anticipated to rise slightly amid the sustained increase in commodities prices and the ongoing energy crisis. In addition to the inflation reports, the Federal Reserve will release its Federal Open Market Committee minutes from its September meeting, which will shed light on the decision to signal to taper. However, uncertainty lingers as the weak job reports figures may subside, which will provide room for the dollar to rise, and stocks to fall.
The common currency recorded new year lows during yesterday’s trading session, dropping 0.17% amid a broader risk-averse sentiment in global markets and monetary policy divergence from the Fed and the European Central Bank (ECB). However, a lack of fundamental drivers keeps the pair fluctuating in tight ranges, driven mostly by market sentiment ahead of the all-important U.S. headline inflation figures. Additionally, ECB governing council member and Bank of France Head Francois Villeroy de Galhau said on Tuesday that the uncertainty in the Eurozone shifted from a growth outlook to an inflation outlook.
The Sterling Pound trades within a tight range against the dollar amid rising uncertainty surrounding the Bank of England’s imminent monetary policy tightening from soaring inflation levels and the energy crisis. Money markets increase expectations for the BoE tightening this week, anticipating a 15 bps increase in December and another 50 basis points by June. That would bring the central bank’s key rate to 0.75% from the current 0.1%. The prospects of several rate hikes are raising serious concerns amongst market participants that rapid policy tightening will hurt consumer confidence, as consumers are already grappling with soaring energy prices and supply chain disruptions.
The Japanese Yen continued to extend losses against the dollar, closing 0.3% lower during yesterday’s trading session. Market participants see the potential for the JPY’s weakness to extend further into and after the 31st October election, although it should regain strength in the long term. Additionally, Japanese Prime Minister Fumio Kishida ruled out introducing capital gains tax, which also boosted equities alongside the weaker Yen. Given a general lack of fundamental drivers, we expect the market sentiment to continue driving the pair.
The Canadian dollar continues to advance against the greenback, recording a new multi-month high during the early hours of today’s trading session. Sustained crude oil prices underpin the Loonie’s momentum, as the West Texas Intermediate (WTI) retreats from its seven-year high, although it still remains firm above USD 80 per barrel. Additionally, lower U.S. Treasury yields undermined the demand for dollars, which kept the greenback on the back foot against most of its peers.
The Mexican Peso recovered 0.72% during yesterday’s trading session after 6 consecutive sessions subdued against the dollar. Mexico’s national gas union, grouping small private and independent liquified petroleum gas distributors, announced an indefinite strike in response to a fuel price increase revealed by the federal energy regulatory commission as part of the government’s energy reform, which is perceived as market unfriendly. Moreover, international tourism picked up in Mexico after the latest report showed that tourists entering Mexico grew by 105.7%, showing a strong recovery from the Coronavirus pandemic.
The Chinese Yuan remained resilient against the greenback even with lower U.S. Treasury yields removing support from the greenback, and expectations from the People’s Bank of China (PBoC). Market participants believe that the PBoC is due to announce its long-awaited reserve ratio requirement cut (RRR) as soon as Friday, amid the broader energy and real estate crisis the country is enduring. Moreover, Trade Balance reports for September released during the early hours of today showed an increase in surplus to USD 66.76 billion, exceeding expectations which were set at USD 47.6 billion, anticipating a contraction from the August reading at USD 58 billion.
The Brazilian market remained closed as the country celebrated the Lady of Aparecida bank holiday, leaving the pair unchanged during the session. However, President Bolsonaro continues to be in the eye of the hurricane, following his latest comments in which said that he does not want to be bored with questions about the 600,000 Covid deaths in the country. In his words, “In which country did people not die?”. The comments have been criticized strongly by the media and other political parties, which has only served to increase the political turmoil in the country.