Daily Market Pulse

Dollar eases as geopolitical tension reduces


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.26% lower and continued to fall further this morning. The dollar index fell as traders assessed easing geopolitical tensions against prospects of more aggressive Fed tightening. The currency's safe-haven demand dropped after Russia withdrew some of its troops near the Ukrainian border, de-escalating tensions with the West. President Putin also informed German Chancellor Olaf Scholz that Russia expects to discuss security guarantees with its Western partners through diplomatic channels. Meanwhile, producer prices in the United States increased by 1% month on month in January 2022, following an upwardly revised 0.4% increase in December and exceeding market forecasts of 0.5% as robust demand, labor, material shortages, and transportation disruptions were carried over to 2022. Moving forward, the minutes of the January Retail Sales and Monetary Policy Meetings will be featured today during the North American session.


The Euro closed 0.46% higher yesterday and extended its uptrend momentum this morning. The Euro gained from a one-week low as investors flocked to safe-haven assets after hints of de-escalation along Ukraine's border, as some Russian forces withdrew. Russian President Vladimir Putin stated that his country does not desire a war in Europe and that he is willing to engage with the West on missile defense and other security matters in the future. Meanwhile, European Central Bank President Christine Lagarde has reiterated that any changes to the bank's policy will be gradual. Elsewhere, the Eurozone recorded a trade deficit of EUR 4.6 billion in December 2021, the second-largest since January 2014 and the largest since January 2013, as a result of increased energy prices and a weaker Euro. Going forward, Eurostat will provide data on December Industrial Production, which is expected to increase at 0.3% monthly. 


The Pound Sterling closed 0.07% higher and continued to rise this morning after the release of key Inflation and Producer Prices data. The British pound rose after the latest set of data bolstered the case for the Bank of England to raise interest rates sooner. According to the most recent figures, annual inflation in the United Kingdom unexpectedly surged to 5.5% in January, a record high since March 1992 and higher than market projections of 5.4%. The Bank of England predicts that inflation will peak at roughly 7.25% in April, significantly above the 2% target, as energy expenses and taxes rise. Furthermore, according to the most recent jobs data, real incomes declined 1.2%, the most since 2014. Money markets anticipate a 25 basis point rate increase in March, with the possibility of a 50 basis point increase rising. Meanwhile, in January 2022, the headline rate of output prices in the United Kingdom increased to 9.9% year on year, up from 9.3% the previous month and far above market expectations of 9.1%. It was the greatest level of output producer inflation since September 2008.


The Japanese Yen closed 0.06% lower against the greenback on Tuesday. The currency continued to weaken against the U.S. dollar on Wednesday, as safe-haven demand for the currency eased after Russia evacuated some troops to the Ukrainian border, de-escalating tensions with the West. Meanwhile, the Reuters Tankan sentiment index for Japanese manufacturers fell to 6 in February 2022 from 17 the previous month. This was its lowest level since March 2021 as pandemic-related restrictions and rising raw material costs dampened morale. Managers explicitly mentioned several concerns, including the rapid spread of the Omicron variant, an ongoing semiconductor shortage, soaring commodity prices, and a weak Yen. Elsewhere, the Nikkei 225 Index rose 2.22%, while the wider Topix Index rose 1.67% on Wednesday, as Japanese stocks ended a two-day slide and mirrored strong gains on Wall Street amid signs of de-escalation between Russia and Ukraine.


The Loonie closed 0.09% higher and continued to edge higher this morning. The Canadian dollar gained ground versus the U.S. dollar as risk appetite increased with tensions in Eastern Europe de-escalating, albeit lower oil prices dampened some of the gains. After President Putin stated that he hoped to negotiate security guarantees with the West through diplomatic channels, the prospect of an impending war in Ukraine became less plausible. Previously, Russian troops from several military districts returned to their bases following the conclusion of exercises near Ukraine. Moving forward, traders are now looking out for Consumer Price index data, which is expected at 4.8% annually in January, to assess the Bank of Canada's rate hike expectation prospects. 


The Mexican Peso closed 0.14% higher yesterday before continuing its uptrend on Wednesday morning. This comes on the heels of a reduction in tensions in the Ukraine-Russia dispute, as Russia decided to recede, resulting in capital flows to riskier assets. Furthermore, the central bank raised borrowing prices by 50 basis points to 6% in its last meeting. The monetary authority stated that inflation risks remain skewed to the upside, with inflation expectations for 2022 and 2023 rising again, while medium-term expectations fell marginally and long-term expectations remained unchanged at levels above the target. Meanwhile, on the domestic front, Mexico says it intends to lift the United States' restriction on Avocado imports within days after identifying the source of a threat to an inspector that caused the suspension.


The Chinese Yuan closed 0.23% higher on Tuesday against the greenback. The Yuan surged against the U.S. dollar on Wednesday as the currency was underpinned by robust settlement needs fueled by strong Chinese exports. Meanwhile, data released on Wednesday revealed that consumer and producer prices in China declined faster than predicted, giving the central bank additional leeway to loosen monetary policies even further. China's annual inflation rate decreased to 0.9% in January 2022, from 1.5% the previous month, and was lower than market expectations of 1%. The CPI grew 0.9% year on year in 2021, significantly below the central bank's aim of about 3% and much lower than the 2.5% gain in 2020. Furthermore, China's producer price inflation fell to 9.1% year on year in January 2022, down from 10.3% the previous month, falling short of market expectations of 9.5%. This was the lowest figure since July, indicating the impact of the government's initiatives to guarantee supply and keep commodities prices under control.


The Brazilian Real closed 0.52% higher in the last session against the greenback following the improvement in the external environment, with the easing of tension between Russia and Ukraine. The exchange rate is expected to favor BRL today as the geopolitical tensions have reduced and the high-interest rate allows more capital inflows into local markets. In addition, the Senate will be able to vote today on two projects that seek to reduce the price of gasoline, ethanol, and diesel. The first ¨freezes¨ ICMS and the second creates a compensation fund to hold increases, which would be funded by an export tax on crude oil. However, in the year of the electoral process, these bills can be understood as populist measures, which would lead to a possible postponement (again) of the vote, favoring the BRL rate.


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