Daily Market Pulse

Dollar drops near seven-month low


The dollar index bottomed around 102, near levels not seen since June 2022. Investors fled the greenback amid expectations that slowing inflation will allow the Federal Reserve to ease up on its aggressive tightening. With U.S. inflation dropping for the sixth straight month in December to 6.5%, investors now expect the Fed to reduce its rate hike to 25 basis points in February after delivering a half-point increase in December. The most active selling was against risky currencies such as the Australian and New Zealand dollars. On the other hand, the dollar rose strongly versus the Japanese Yen as the Bank of Japan resisted speculation of another policy shift by retaining ultra-low interest rates and keeping its yield control program unaltered.


Despite the pain from the European Central Bank's dovish report, the Euro improves amid a weaker U.S. dollar. Bloomberg reported on Tuesday, citing sources, that the European Central Bank (ECB) was mulling a slower pace of interest rate hikes, with a 25 basis point increase following the predicted 50 basis point increase in February. Following Tuesday's strong Germany ZEW survey, traders digested consumer price inflation in the Eurozone, which was confirmed at 9.2% year on year in December 2022, down from 10.1% in November and 10.6% in October. This suggests that European Central Bank policymakers may continue to tighten policy for some time.


The British Pound climbed above December 14th levels for the first time following the release of Britain's CPI report. The inflation report showed that the CPI slowed to 10.5% in December, moving farther away from October's 41-year peak but remaining considerably above the Bank of England's 2% target. Nonetheless, the core CPI rate remained steady at 6.3%, not far from the record high of 6.5% set in October, while food and beverage prices grew at the fastest rate since 1977, implying that inflation will continue high for some time. Earlier this week, the UK released its latest jobs report, which revealed that the unemployment rate remained close to a 50-year low. 


On Wednesday morning, the Japanese Yen sank more than 2% against the dollar, falling abruptly from multi-month highs following the Bank of Japan’s policy decision. The BOJ resisted speculation of another policy adjustment by retaining ultra-low interest rates and holding its yield control policy unaltered. The central bank maintained its yield curve management targets of -0.1% for short-term interest rates and near 0% for the 10-year yield, as well as the 0.5% cap for the latter, signaling that officials are not seeking a speedy departure from enormous stimulus despite rising market pressure. Some traders now believe that the BOJ will change policy in April when the new governor takes office, while others believe it will change in June.


The Loonie gained ground throughout the first part of the European session, supported by a rise in crude oil and a weaker dollar. Crude oil prices have risen to their highest level since early December in hopes that China's tough Covid-19 regulations will increase gasoline consumption. The commodity-linked Loonie is supported by this, as well as the advent of strong intraday selling surrounding the U.S. dollar. In other news, headline inflation decreased to 6.3% in December, falling short of market expectations of 6.4% and continuing to fall after reaching a 39-year high of 8.1% in June. The finding confirms prior statements by Bank of Canada officials that the bank's tightening cycle is nearing a conclusion, supporting demand for Canadian shares.


Following a small shift on Tuesday, the Mexican Peso is up 0.19% against the U.S. dollar for the day as market sentiment improves. According to CFTC statistics, investors were net short the Mexican Peso by 53,381 contracts in the week ending January 10, a minor decrease from the previous week's net short position of 56,376 contracts. High FX carry, particularly when adjusted for volatility, keeps the Mexican Peso as the favored currency to hold in Latin America. Recent rate hikes have pushed borrowing prices closer to their so-called terminal rate, which may be between 10.75% and 11.5%, according to Banxico deputy governor Jonathan Heath on Monday. Heath does not expect the terminal rate to reach 11%, but he does expect peak rates to persist for at least six months to ensure inflation subsidies.


On Wednesday, China's Yuan fell to a one-week low against a broadly stronger dollar, as seasonal demand for the currency ahead of the Lunar New Year holidays weighed on the Chinese currency. The Yuan and Chinese assets were supported by investor prospects for economic resurgence following the reopening of the border. Currency dealers believe that recent greater volatility, with the Yuan reaching a six-month high this week before reversing much of its gains, was caused in part by seasonal reasons. Analysts and economists predict that the seasonal disruptions will disappear after the holiday.


The Brazilian Real began the day stronger as the U.S. dollar fell across the board. Domestically, investors are keeping a close eye on Fernando Haddad, Minister of Finance, as he speaks at the World Economic Forum in Davos. Haddad had previously stated that the country's new fiscal framework would be introduced by April. In this scenario, investors are looking for new clues about the economy's path. The minister also discussed tax reform, which should be divided into two stages. "Bring the Brazilian tax system back into balance in order to enhance income distribution in Brazil," he stated. Wednesday is a busy economic day across the world. Earlier, Eurostat, the European Union's statistical agency, revealed that consumer inflation in the eurozone reached a peak of 9.2% in 2022, as forecast.


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