Daily Market Pulse

Greenback falls back amid softer Treasury Yields


The U.S. dollar index, a common tool used to assess the performance of the greenback against a basket of six major currencies, retraced 0.49% amid U.S. inflation reports shifting U.S. treasury bond yields driving the demand for dollars. However, the market mood remains cautiously optimistic as the dollar continues to extend losses during the early hours of Thursday’s trading session.  Inflation reports revealed that the U.S. Consumer Price Index edged higher to 5.4% on a yearly basis in September, up from 5.3% in August. Additionally, Federal Open Market Committee minutes showed that Fed officials broadly agreed last month that they should start reducing emergency pandemic support for the economy in Mid-November or Mid-December amid increasing concern over inflation reflected in the latest inflation report. Market participants generally assessed that, provided the economic recovery remained broadly on track, a gradual tapering process that concludes around the middle of next year would likely be appropriate. Now, the market focus shifts towards mid-tier data releases with upcoming Producer Price index reading and Jobless Claims. 


The common currency erased October losses, bouncing back from year-to-date lows and closing 0.57% higher against the greenback. The EUR remained subdued before the USD amid a divergence in approach from policymakers, which has been sustained in recent interventions from the European Central Bank. The ECB sees inflation pressure as transitory, and has indicated that the next “live” meeting is in December. Rising inflationary data may continue to weigh on the EUR and policymakers in other jurisdictions have shifted their stance from “transitory inflation”. Policymakers underscored their desire to avoid any premature withdrawal of accommodation and have also stressed that current upside inflationary pressures are driven by supply costs and labor constraints hampering activity.  


The tone around the British Pound shifted significantly in the last few trading sessions amid hawkish signals from BoE, Brexit news and softer U.S. treasury yields. The Pound Sterling rallied 0.56% during yesterday's trading session against the dollar and today, it still sustains momentum, changing hands 0.5% higher from the previous close. The European Union offered to reduce customs checks and paperwork on British products intended for the Northern Ireland Protocol, which drew support for the Pound and  eased worries about EU-UK frictions. The encouraging Brexit news came after the Bank of England signaled an imminent rate hike and acted as a tailwind for cable to capitalize on gains.    


The Japanese Yen edged 0.29% higher against the dollar during yesterday’s trading session after remaining subdued for several sessions. The Japanese Yen is particularly sensitive to monetary policy differentials and has been falling against its major peers. The Bank of Japan discarded the possibility of any rate hike for the foreseeable future, and with the Yield curve under control, the JPY remains vulnerable against monetary tightening expectations in the rest of the world’s major economies. 


The Loonie sustains momentum against the greenback, amid easing U.S. treasury yields and sustained crude oil prices which underpin the commodity-linked currency. The Canadian dollar advanced 0.42% during the early hours of today’s trading session as the greenback lost momentum off the back of softer U.S. treasury Yields following the release of inflation figures showing 5.4% headline inflation vs 5.3% previously anticipated. Moreover, the West Texas Intermediate boosts the Loonie, advancing 0.5% trading above USD 80 per barrel.  


The Mexican Peso rallied 1.12% against the dollar amid a broader greenback weakness sponsored by retracting U.S. treasury yields and encouraging job reports from Mexico’s social security institute. The figures revealed that between January and September 2021, over 800k formal jobs were created, showing an annualized increase of 4.5%. The transport and communication sector saw the greatest annual increase in Job recreation, reporting 10.7% growth during the same period. 


The Chinese Yuan recorded gains during yesterday’s trading session, closing 0.35% higher against the dollar. The Peoples Bank of China Governor, Yi Gang, reiterated on Thursday the central bank will make prudent monetary policy flexible, targeted, reasonable, and appropriate. The spokesman added that China’s inflation is moderate overall, with the Consumer Price Index rising 0.7% year over year, although factory-gate inflation climbed 10.7%.  


The Brazilian Real recovered 0.41% during yesterday’s trading session amid broader dollar weakness and revised growth forecasts from the Brazilian economy. The International Monetary Fund (IMF) revised down its growth projections for Brazil for this year from 5.3% to 5.2%, while readings for 2022 were cut over 0.4 percentage points down to 1.5%. The Revision is well below the regional average of Latin America and the Caribbean, which is forecasted to grow 6.3% this year and 3% in 2022. 


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