Daily Market Pulse

Dollar struggles as the markets remain quiet


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.34% higher before losing its steam on Tuesday morning. Following Monday's rush to safety, markets are relatively quiet early Tuesday as investors remain focused on geopolitics. The dollar is struggling to maintain its strength versus its major rivals, and U.S. stock futures are trading flat in Europe this morning. U.S. Secretary of State Antony Blinken has ordered the closure of the U.S. embassy in Kyiv and has urged Americans to leave the country, citing a rapid buildup of Russian forces along the border. Meanwhile, St. Louis Fed President James Bullard stated on Monday that the central bank must be aggressive in combating inflation, despite initially pushing for a full percentage point increase by July. Investors are now looking forward to the Monetary policy meeting on Wednesday as well as statements from numerous Fed members this week for new information on the timing and magnitude of rate hikes. Going forward, Investors will see the Producer Price Index, which is expected at 7.9% annually for January, later today to drive dollar prices further. 


The Euro closed 0.33% lower yesterday before regaining its momentum this morning ahead of the key economic data from Eurostat. The Euro fell in the third week of February as investors fled to safe havens as the likelihood of a military conflict in Europe grew and European Central Bank (ECB) policymakers lowered expectations of a more hawkish monetary policy stance. The U.S. has warned that Russia might invade Ukraine at any time, and the G7 Finance Ministers have threatened Russia with "huge" economic consequences if this occurs. Meanwhile, the Eurozone economy grew by 0.3% quarter on quarter in the last three months of 2021, matching preliminary estimates. It is the weakest growth rate in three quarters, as the Omicron coronavirus strain swept over the European continent later in the year with restrictions causing harm to the services industry. This was worsened by labor shortages due to illness and quarantine measures. In addition, the ZEW Indicator of Economic Sentiment for the Eurozone decreased 0.8% to 48.6 in February 2022, reflecting persistent concerns about inflationary pressures.


The Pound Sterling closed 0.27% lower, although regained its positive traction during Tuesday morning. The Pound sterling gains ground after labor market numbers are released. The unemployment rate in the United Kingdom remained at 4.1% in the fourth quarter of 2021, the lowest since the second quarter of 2020 and in line with market predictions. Furthermore, the number of people working in the UK declined by 39,000 quarter on quarter to 32.485 million in the final three months of 2021, falling short of estimates of a 65,000 drop. Meanwhile, preliminary estimates suggest that labor productivity in the UK climbed 1% quarter on quarter in the last three months of 2021, the largest increase since Q3 2020, following an upwardly corrected 1.5% dip in the preceding period. Furthermore, average weekly wages including bonuses in the UK grew 4.3% year on year to GBP 596 in the three months to December 2021, exceeding the previous period's one-year low of 4.2% but much beyond market predictions of 3.8%. Moving forward, traders will see U.S. economic docket release to provide further impetus to Sterling. 


The Japanese Yen closed 0.06% lower yesterday against the greenback. The Yen maintained stability against the U.S. dollar on Tuesday, after gaining some ground late last week as geopolitical uncertainties bolstered demand for the currency as a safe haven. Meanwhile, consumer expenditure in Japan grew 2.7% to 294,070.4 billion Yen in the fourth quarter of 2021 from 286,360.8 billion yen the previous quarter, accounting for over half of the country's GDP.  The data arrived above market expectations of a 2.2% increase after Japan relaxed coronavirus restrictions in October. This helped boost service-related consumption such as hotels, restaurants, and entertainment. Consumer spending helped Japan's economy bounce significantly, expanding 5.4% on an annualized basis in the fourth quarter of 2021. In other news, the Nikkei 225 Index sank 0.79%, while the wider Topix Index fell 0.83% on Tuesday, as Japanese stocks continued under pressure after a dismal overnight session on Wall Street. 


The Loonie closed 0.05% higher and continued to edge higher this morning. A positive shift in global risk sentiment weighed on the safe-haven U.S. dollar, which was viewed as a key factor supporting the Loonie. In the most recent geopolitical developments, Russia announced that some military drills had concluded and that some troops had begun returning to bases. On the corporate front, National Bank of Canada analysts has lifted Constellation Software's target price to C$2,350 per share from C$2,100 previously. Meanwhile, the Canada Border Services Agency reported that traffic has resumed on North America's busiest bridge connecting Canada and the United States after police made multiple arrests, thereby ending a six-day blockade organized by the "Freedom Convoy" demonstrators. Elsewhere, the S&P/TSX, Canada's main stock index, fell 0.9% on Monday amid a global risk-off mood, owing to an escalation of geopolitical tensions in Eastern Europe and rate hike fears.


The Mexican Peso closed 0.59% higher yesterday before consolidating its losses this morning. This comes after the Central Bank of Mexico (Banxico) raised borrowing prices by 50 basis points to 6 percent, prompting the Peso to surge to levels not seen since January 18th. Domestically,  Mexico's president, Andres Manuel Lopez Obrador (AMLO), has launched an attack on the journalists who have exposed his son's opulent lifestyle in Houston as well as those who have referred to his management as "beaters, mercenaries, and [sell-outs]." Moving forward, traders will see wider market sentiments and U.S. economic docket releases to drive Peso prices further. 


The Chinese Yuan closed 0.06% higher on Monday against the greenback. The Yuan strengthened against the U.S. dollar on Tuesday, despite the fact that the central bank pumped extra cash into the financial system to spur growth. With its medium-term lending facility, the People's Bank of China (PBOC) infused a net 100 billion Yuan into the banking sector while keeping the borrowing rate steady. This comes after the PBOC dropped the 1-year policy rate by 10 basis points to 2.85% last month, resulting in a net 200 billion yuan in MLF loans. As growth headwinds linger, the Chinese central bank recently dropped many key short- and medium-term interest rates, with analysts predicting more easing measures in the coming months, including a 50 basis point cut in the reserve requirement ratio. Markets are also anticipating the PBOC's announcement on the 1-year and 5-year loan prime rates on Feb. 20, with both LPRs expected to be reduced by 5 basis points.


The Brazilian Real closed 0.68% higher in the last session amid investors' appeal towards domestic markets. Market participants attributed Real's performance to the view that Brazil is appealing for new foreign capital inflows, with the high level of basic interest rates improving the profitability of the local fixed income market. In the minutes of the most recent Monterey policy meeting, the Central Bank suggested that the next hike in the basic interest rate, scheduled for mid-March, will be smaller. However, according to numerous analysts, the Central Bank signaled a slower rate of increase in the Selic rate, but no imminent pause. Meanwhile, according to the Focus bulletin released this Monday, financial market economists upped their inflation projection for 2022 for the fifth week in a row, increasing it from 5.44% to 5.50%. Overseas, as tensions over Ukraine rise, Russian Foreign Minister Sergei Lavrov proposed to Russian President Vladimir Putin on Monday that Moscow maintain the diplomatic path in its efforts to extract security guarantees from the West.


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