Daily Market Pulse

Dollar drops to three months low


As market sentiment improves early Tuesday, the U.S. dollar is struggling to build on Monday's modest gains. The dollar is drifting towards a three-month low as the Federal Reserve appears to be slowing the pace of its monetary policy tightening. Fed Vice Chair Lael Brainard was among the most recent policymakers to echo the slowdown, stating that the U.S. central bank has already done a lot to keep inflation under control, laying the groundwork for a 50 basis point raise in December. Fed Governor Christopher Waller indicated that the central bank might decrease the pace of rate hikes in subsequent meetings but highlighted that officials are not on the verge of a pause. Later in the day, the October Producer Price Index (PPI) data from the United States will be scrutinized for new impetus.


Euro staged a rebound late Monday and ended up closing the day negatively. However, the common currency is swinging higher this morning as the market sentiment improves amid the prospects of the U.S. Fed slowing down. Also, the Euro's upside is fueled by the European Central Bank's monetary tightening. The ECB is seen tightening monetary policy further to tame stubbornly high inflation, despite fears of economic slowdown. Elsewhere, the latest data shows that the Eurozone economy expanded 0.2% in the three months to September 2022, in line with the first estimate. It marks a sixth straight quarter of expansion but the weakest in the current sequence. 


The British pound recovered today, hovering near its highest level since late August, as strong pay growth data in the UK kept the pressure on the Bank of England to keep raising interest rates despite signs of an economic slowdown. Meanwhile, British Finance Minister Jeremy Hunt will unveil the government's fiscal plan on Thursday, which is expected to include £60 billion in tax increases and spending cuts as the country attempts to repair its public finances and regain economic credibility. Elsewhere, the Sterling has lost around 13% against the U.S. dollar so far this year.


The Japanese Yen dropped against the dollar today, retreating from two-month highs, as statistics revealed that Japan's GDP unexpectedly declined in the third quarter due to global inflation pressures and a weak currency that increased import costs. Bank of Japan Governor Haruhiko Kuroda also stated this week that the central bank would continue to use monetary easing to boost the economy, citing the objective to achieve long-term inflation accompanied by wage growth. Furthermore, the Yen was under additional pressure from a recovering dollar after a top U.S. central banker urged investors not to get too excited about a single inflation data and said that U.S. rates could end higher than expected. Meanwhile, investors were wary of any government action to bolster the Yen.


The Loonie is on the rise this morning as market sentiment improves as a result of fears that the U.S. central bank will ease monetary policy. The favorable trend was aided by developments in China. Until Wednesday's inflation data, the Canadian dollar's direction will be determined by external forces. According to consensus, the CPI for October will rise to 0.7% from 0.1% previously. A higher-than-expected reading fuels expectations for more aggressive rate hikes by the Bank of Canada.


After climbing 0.79% yesterday, the Mexican Peso is extending its gains this morning as risk flows return to the market. Meanwhile, Mexican swaps rose a few basis points on Monday as U.S. yields rose. The short end of the curve predicts that the current tightening cycle will terminate with less than 75 bps of additional tightening, bringing the terminal rate down to 10.75% by 1Q 2023. Furthermore, rising crude oil prices bolster the Peso's recent strength. In other news, investors revised their forecasts for the Federal Reserve's hawkishness in upcoming meetings. Fed Governor Waller stated that, despite the likelihood of lesser rate hikes beginning in December, the central bank is not weakening its tightening cycle's eventual aim. Elsewhere, Mexicans protest AMLO's plan to overhaul the electoral system.


The Yuan firmed higher against the dollar today, hovering near its strongest levels in over a month after Chinese President Xi Jinping and U.S. President Joe Biden met at the sidelines of the G20 Summit in Indonesia and called for reduced tensions between the world’s two biggest economies. The Yuan has also benefited from substantial policy revisions concerning China's property sector and Covid strategy, two of the country's largest drags on the economy. These developments mitigated the impact of disappointing domestic statistics, particularly industrial production and retail sales figures that fell short of expectations in October. Furthermore, the People's Bank of China left its medium-term policy loan rate steady for the third month in a row, indicating that authorities are concerned that further easing may spark further Yuan depreciation.


Yesterday, the Brazilian Real gained 0.02% against the U.S. dollar. Investors continue to evaluate central bank macroeconomic data and monitor fiscal concerns associated with Brazil's government transition. Despite raising inflation projections for this year to 5.8% from 5.6% previously, the Central Bank of Brazil's focus survey maintained growth expectations at 2.8%. Meanwhile, preliminary data from the bank's economic activity survey indicated 1.36% GDP growth in the third quarter. Investors are also waiting to see who will be on Lula's economic team beginning next year.


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