Daily Market Pulse

Dollar index soars on data and hawkish fed yield lifting


The US dollar index, which measures the greenback's performance against a basket of six major currencies, climbed 0.67 percent, setting a fresh cycle high in 16 months in the early session of Wednesday followed by a modest fall during the opening session of European trading. The latest rise derives from prevailing inflation, higher figures of US retail sales yesterday and favourable fed talks. The minor negative comes from a reversal in US yields today, down by 0.014 bps after reaching high levels of 1.65 percent in the early session. Investors are looking forward to housing starts and building permits data on Wednesday. Policymakers are recommending a more hawkish direction in the opening of the new year. Against the greenback positive, the S&P 500 and Nasdaq composite display moderate daily gains as US stock futures indexes go sideways.


The Euro plummeted 0.04 percent versus the dollar in the early session, touching fresh lows not seen since July 2020, but quickly reversing course to around 1.1300 levels, 0.06 percent lower from the opening session. The currency's significant decline is attributed to an increasingly risk-off environment and a stronger dollar, while a decline in treasury yields gave some support to help the currency rebound back from today's lows. Meanwhile, Germany halted approval of the Nord Stream 2 project, causing an increase in natural gas prices, adding another negative weight to the currency. Market investors are awaiting consumer price index data, which is projected to show a year-over-year increase of 4.1 percent. Bruno Le Maire, France's finance minister and a member of the European Central Bank's council, stated that inflation is temporary and will ease next year.


The Sterling has risen to one-week highs and gained 0.25 percent against the greenback since the opening session. Intraday buying increased in response to robust inflation figures, which came in at 4.2 percent vs the predicted 3.9 percent. The upside was bolstered by yesterday's excellent employment numbers, which, along with a robust inflation print, assures the Bank of England of a decision to boost rates by 15 basis points in December. Although inflation data and anticipation for rate hikes boosted the currency's value against the dollar, investors remain wary due to Brexit concerns. According to economists, a deal on the Northern Ireland protocol can be reached with the EU before Christmas, and the EU team is eager to make headway on this.


The Japanese Yen gained 0.31 percent, surpassing a four-week high and trading at its strongest level since March 2017. The currency pair's upside is supported by a mix of increasing US yields and a rise in the dollar. The softer equity markets tone acted as a headwind for the pair, limiting upside potential, while the downside remains cushioned due to the recent widening of the US-Japanese bond spread. The yield on a 10-year Japanese government bond remains close to zero due to the country's yield curve control programme. Market players are anticipating that  US housing data, which, together with US bond yields, will boost USD demand and support the USD/JPY pair.


The Loonie lacked direction following the previous day's positive comeback, trading about 0.11 percent lower during the European markets opening session. A dovish tone in relation to crude oil prices, combined with the absence of new consumer price index data, depressed the loonie and prolonged support for the USD/CAD pair. Investors are awaiting Wednesday's inflation report in order to put serious bets and give the currency pair a boost. The downside remains limited due to the strong US dollar, which has been strengthened by the Federal Reserve's early rate hike expectations. Market investors anticipate another rate hike by July 2022, and the Fed fund futures indicate a strong likelihood of another in November.


The Mexican Peso sustained losses during yesterday’s trading session, closing 0.65% lower against the greenback amid a broader strength of the USD driven by sustained inflation figures and favourable Fed talks. Moreover, the peso managed to cap losses following the release of record-high agri-food exports during the first nine months of the calendar year. The Mexican authorities announced that agri-food exports totalled USD 32,75 billion in the first nine months of 2021, the highest in the past 29 years. The report highlighted the most significant exported products were beer; followed by tequila & Mezcal and avocados.  


The Chinese yuan attempts once again to advance against a stronger dollar, edging 0.17% higher during the early hours of the trading session and the currency targets the year to date highs recorded yesterday. However, the People’s Bank of China remains concerned over the sustained pressure from the U.S. Treasury yields over FX rates and onshore stability of the renminbi. Several market participants expect that Chinese policymakers will slowly raise its policy rate by 10 bps per quarter throughout the course of 2022. 


After Monday’s national holiday, the Real closed down 0.76%, trading at 5.4977, reflecting the strength of the Dollar abroad and the negative repercussions of the postponement of the affiliation of President Bolsonaro to the Liberal Party. In addition, the Central Bank's Economic Activity Index (IBC-Br) did not help the currency, as it recorded a drop of 0.27% in September compared to August, indicating a 0.14% decline in the third quarter. The IBC-Br indicator is considered a preview of GDP and, in the wake of its result, we can expect a disappointing GDP for the previous quarter and for the current quarter. The confluence of high inflation, high basic interest rates and fiscal uncertainties, amid current problems in supply chains, will add pressure on the country's economic growth.


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