Daily Market Pulse

Dollar struggles to build on yesterday’s gain


The U.S. dollar profited from a risk-averse market environment on Thursday, outperforming its key competitors, with the dollar Index rising about 0.8%. Early Friday, the market sentiment seemed to have improved slightly, making it harder for the U.S. dollar to build on Thursday's rise. Also on Thursday, markets digested data revealing that U.S. retail sales activity and manufacturing PMI fell more than expected, fueling suspicion that the Fed's aggressive tightening drive is already weakening the economy. Finally, later in the day, S&P Global will release the preliminary Manufacturing and Services PMI survey, providing new momentum ahead of the weekend.


The Euro jumped to its highest level in over six months in response to Lagarde's comments but then reversed course in the second half of the day, closing nearly flat on Thursday. The common currency advances somewhat early Friday as market sentiment improves. Meanwhile, European Central Bank President Christine Lagarde stated in a post-meeting press conference yesterday that it was evident that future 50 basis point rate increases would be expected for some time, providing support for the Euro. In terms of data, In November 2022, consumer price inflation in the Eurozone was updated to 10.1% annually, up from a preliminary estimate of 10%. The rate has slowed for the first time since June 2021, although it is still significantly above the ECB's inflation objective.


Sterling fell 2% on Thursday before recovering slightly on Friday. The UK's Office for National Statistics published data earlier today revealing that Retail Sales in November fell by 0.4% after increasing by 0.9% in October. Despite coming in lower than the market's projection of 0.3% growth, this reading failed to elicit a noteworthy market reaction. In the United Kingdom, the Consumer Confidence indicator rose slightly to -42 in December 2022, improving for the third consecutive month but remaining close to a record low of -49 reached in September as high inflation continued to erode household income and the country braces for a prolonged recession.


The Japanese Yen remained subdued, under pressure again after the U.S. Federal Reserve provided a more hawkish stance on policy than markets expected, albeit with a more mild half-point rate hike. BNP Paribas Japan chief credit strategist Mana Nakazora, a likely candidate for Bank of Japan deputy governor next year, also recently told Reuters that the central bank should amend a policy statement to give itself greater room to adjust interest rates. She urged that the BOJ "convey that interest rates may move up or down based on economic conditions" and that the "massive monetary easing" should halt. BOJ Governor Haruhiko Kuroda has repeatedly stated that the bank's huge stimulus must be maintained until the 2% inflation target is met sustainably.


The Loonie continues to fall today, but it has recovered modest strength to end the week positively on the heels of the weak dollar. Next week's inflation figures (producer price index, or PPI, and consumer price index, or CPI) will be critical for the next Bank of Canada (BoC) meeting in January after the BoC announced that it would assess whether further raises are necessary. Furthermore, the Bank of Canada stressed that inflation remains elevated and that it will need to drop before it can suspend its tightening cycle. Next week, retail sales will be announced, and the bank expects to see the delayed effect of tightening financial conditions dragging on the Canadian economy.


Peso deepens its losses from yesterday against the greenback. Nonetheless, the Peso has remained nearly below  seven-week highs as investors digested Banxico's policy announcement. The Bank of Mexico upped its benchmark policy rate by 50 basis points, as predicted, pushing borrowing costs to new highs. For the sixth time in a row, the decision matched the Federal Reserve's move, as the central bank reduced the rate differential to decrease capital outflows and support the Peso. Policymakers also indicated that it will continue to boost its key rate in 2023 in order to combat rising inflation. Since June 2021, the Peso has surged field by a hike of 650 basis points, making it one of the few currencies that have appreciated against the U.S. dollar year to date.


The offshore Yuan has strengthened after the government announced more policy support for the struggling housing sector. The PBOC pumped more money into the money market. Liu, Vice Premier, stated that the property business is an important pillar of the Chinese economy and that new measures are being studied to strengthen the sector's assets and liabilities, guide market expectations, and boost confidence. The government is extremely certain that the economy will improve next year. "Over the next 12 months, we expect Yuan to strengthen on the back of improving GDP prospects following reopening," Goldman Sachs wrote in a research report. Still, near-term Yuan depreciation pressures may be here to stay since the interest-rate differential between China and the U.S. remains wide, and Chinese activity growth may slow in the early stages of reopening.


The Real rose marginally this morning as market confidence improved, although investors remain concerned about rising interest rates in the United States and Europe. In Brazil, the market is watching the progress of the State-Owned Companies Law and the Transition PEC in Congress. The Senate President, Rodrigo Pacheco (PSD-MG), stated the day before that the bill amending the State-Owned Companies Law will not be voted on this week or next. The Transition PEC, which intends to raise the expenditure ceiling to pay social benefits promised by the president-elect, Luiz Inácio Lula da Silva, should only be voted on next week in the Chamber of Deputies.


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