The U.S. dollar index rose 0.5% during the early hours of Thursday amid spooky geopolitical tension which erased Wednesday losses against most of its peers. However, despite the uncertainty arising from the Russian missiles landing in Poland, the dollar remains relatively steady as well as U.S. treasury yields which seem to have stabilized around 3.7% after the significant correction we witnessed by the end of last week. On the data front, better than expected Retail Sales from the U.S. failed to provide support to the greenback as market participants continue to price a smaller rate increase in December. According to the CME Group FedWatch tool, markets consider an 85% probability of a 50 bps hike from the Federal Reserve on the last meeting of the year. Today, we expect some flow of data with October Housing Starts, Building permits, and weekly Initial Jobless Claims as well as several FOMC policymakers will be delivering speeches.
The Euro erased yesterday's gains during the early hours of Thursday morning following the announcement of lower-than-expected inflation readings in the Euro area. Eurostat announced that the Harmonized Consumer Price Index recorded a 10.6% annualized increase, marginally lower than the 10.7% expected as well as posted in its previous release. The reading provided a sigh of relief that inflation may have peaked but confirmation of this phenomenon is still to be seen. ECB’s Centeno said that the central bank has no option but to act to avoid an extended bout of inflation that would spark an economic downturn concluding that “Inaction is not an option”.
Jeremy Hunt, the U.K. Chancellor of the Exchequer is announcing the Autumn fiscal statement where he is unveiling a GBP 54 billion package of tax rises and spending cuts. The pounds and Gilt yields remained subdued ahead of the Autumn statement. The Chancellor said the U.K. is already in recession, announcing cuts to growth forecasts as Russia’s war in Ukraine stokes inflation at a 41-year high announced yesterday at 11,1%. The British economy is forecast to shrink by 1,4% next year, a significant cut from its previously announced 1.8% growth, predicting global headwinds in the House of Commons. Moreover, Andrew Baily said that they will still likely increase rates further but highlighted that the committee was observing signs that supply chain disruptions are fading.
The Japanese Yen remains on the back foot against the dollar although the currency trades within a tight range amid global geopolitical tensions. The Bank of Japan Haruhiko Kuroda said earlier today that policymakers were expecting CPI growth to fall below 2% in the next fiscal year with the cost-push factor tapering off. Additionally, BoJ’s Uchida spoke during the parliamentary session explaining that policymakers won’t rule out raising interest rates before adjusting the size of its balance sheet when the time comes to exit from monetary easing. In the same parliamentary session, Finance Minister Suzuki said that the government will make comprehensive considerations in selecting the next BoJ governor.
Despite the CAD being the best-performing currency in G10 so far in 2022, yesterday the Loonie dropped 0.37% against the Dollar. Weaker oil prices given a new Covid outbreak in China raises concerns over slowing fuel demand, which undermines the oil-linked CAD. On the other hand, China’s latest efforts to support the economy are lifting the gloom around commodities markets although a sustained recovery in demand might take longer to concretize. Overall It has proven more resilient to external instigators, such as slowing global growth, hawkish Fed, and risk aversion.
The Mexican Peso jumped as much as 0.19% on Wednesday, amid a weaker USD and lower Treasury yields. The stock market fell back after climbing the day before to levels not seen in more than five months. Market players are still looking for clues about the future of the bullish cycle of the Fed. Overall market bias is toward going long peso. Moreover, international news about Covid prevention measures in China, a bailout package for the Chinese real estate sector, a cooling in tensions between the US and China, and geopolitical tensions in eastern Europe are adding more volatility to the market.
Yesterday, the Chinese Yuan gave back most of the recent gains (-0.75%) against the greenback. Investors are still concerned about the lack of visibility on the next steps of the Chinese government regarding its zero-Covid strategy. Moreover, with growth prospects increasingly dim and the PBoC keeping to an accommodative monetary policy stance to support growth, the CNY might continue to see further depreciation. On the other hand, China registered large trade proceeds from your exports (USD730bn YTD compared with USD510bn last year) but has kept a relatively low trade conversion ratio so far this year at 30%. Given this backdrop, market analysts are assessing the strengthening effect of USD selling on the CNY if exporters start to convert their USD revenue.
Brazilian markets reopened yesterday after a bank holiday, with the BRL closing 1.26% down, amid reports on how the incoming government plans to sidestep spending caps to fulfill Lula’s campaign promises. That said, investors are cautiously worried about the new fiscal framework, which could add even more pressure on the public accounts. At the same time, international headlines converged around Covid prevention measures in China, a bailout package for the Chinese real estate sector, and a cooling in tensions between the US and China, adding a soft tone across markets. Looking ahead, markets will monitor Lula´s government efforts to get congressional permission to breach the spending rule, which limits growth in public spending to the previous year’s inflation rate. Later today, Brazil is set to report inflation data.