Daily Market Pulse

Dollar set to snap its five week rally


The U.S. dollar continued to fall versus its main counterparts on Thursday, but a shift in risk sentiment helped the currency shake off the selling pressure early Friday. The U.S. dollar index closed 0.54% lower and maintained its drop on Friday, heading for the first down week in six, anguishing at a one-week trough as investors assessed the impact of the Federal Reserve's gradual tightening of monetary policy. On the political front, headlines surrounding the Russia-Ukraine discussions suggested that the two nations were getting closer to a peace deal, but officials from both countries acknowledged their stances remained far apart as the war reached its fourth week. Furthermore, the greenback fell even after the Fed raised interest rates for the first time since 2018 and signaled a quarter-point increase at each of its six remaining policy meetings this year to combat inflation. Elsewhere, in the early European session, U.S. stock index futures are down between 0.3 and 0.6%. Going forward, February's Existing Home Sales data from the United States will be highlighted on the economic calendar, but investors will remain focused on the news surrounding the Russia-Ukraine situation.


The Euro closed 0.50% higher on Thursday before losing its momentum Friday morning. The Euro rose as the U.S. dollar declined amid continued cease-fire talks between Ukrainian and Russian officials. Meanwhile, the Eurozone's annual inflation rate surged to a new record high of 5.9% in February 2022, up from 5.1% in January and above preliminary expectations of 5.8%. The inflation rate is about three times the European Central Bank's (ECB) target of two percent, and is anticipated to grow much further as the war in Ukraine has aggravated the energy situation, threatening to drive up fuel prices even further. Christine Lagarde, president of the European Central Bank, stated that the central bank will stay flexible as the crisis threatens to put in motion "new inflationary trends." Moving forward, the eurozone's January trade balance will be highlighted while investors will be looking for geopolitical updates.


The Pound Sterling closed flat yesterday and appears to be relatively quiet while opening for Friday. The pound fell marginally when the Bank of England raised interest rates to pre-covid levels, as predicted, at its March 2022 meeting, though the hawkish tone softened. One policymaker voted to keep rates steady, but all members favored a rate hike in January and officials suggested additional tightening of policy "may be" appropriate in the coming months rather than "likely" last month. Simultaneously, the central bank cautioned that Russia's invasion of Ukraine will likely raise prices and hinder development. Inflation is now forecast to rise to 8% in the second quarter, around 1% more than in February. In other news, UK Foreign Secretary Liz Truss has directed staff to proceed with plans to suspend sections of the post-Brexit deal for Northern Ireland, a move that would exacerbate tensions with the European Union.


The Japanese Yen closed 0.11% higher in the previous session against the greenback. The Yen weakened against the U.S. dollar on Friday after falling for two weeks in a row to its lowest level since January 2016 as the Bank of Japan (BOJ) maintained its massive stimulus and warned of rising risks to the fragile economic recovery from the Ukraine crisis. This reinforced views that it will remain dovish despite a global shift toward tighter monetary policy. While inflation is expected to approach or even exceed the central bank's 2% target in the coming months, the BOJ is not in the mood to withdraw stimulus because it sees the recent energy-driven price rise as a potential threat to an economy that is still recovering from the coronavirus pandemic. In other news, the Nikkei 225 Index rose 0.65%, while the broader Topix Index rose 0.54% on Friday with both benchmark indexes having their best week in nearly two years thanks to the Federal Reserve's measured move to tighten policy and the Bank of Japan's decision to maintain ultra-easy policies.


The Loonie closed 0.39% higher in the previous session before extending its gains this morning. The Canadian dollar rose against the U.S. dollar in the third week of March, its highest level since January 25th, on the back of a rebound in commodities prices and increased interest in riskier currencies. Demand for safe-haven currencies slipped after the Kremlin announced that it would make efforts to reach a cease-fire agreement with the Ukrainian delegation. Simultaneously, higher-than-expected domestic inflation figures for February bolstered predictions that the Bank of Canada will retain its hawkish approach throughout the year. In other news, Canada's S&P/TSX Composite index closed 1.4% higher on Thursday, the highest closing on record, and recorded gains for the third consecutive day thanks to significant weighting in the energy and mining sectors amid a surge in crude oil and gold prices.


The Mexican Peso closed 0.55% higher yesterday and continued to extend its gains modestly on Friday morning. The Mexican peso rose against the U.S. dollar, continuing its recovery from a three-month low when the U.S. dollar fell despite the commencement of the Fed's policy tightening cycle. Domestically, rising commodity prices have fueled anticipation that the central bank will raise interest rates at its March meeting, despite evidence of a slowing economy. On concerns about inflationary pressures, Mexico's central bank raised interest rates for the sixth time in a row in February, raising borrowing prices to 6%, the most since April 2020.


The Chinese Yuan closed flat in the previous session against the greenback. On Friday, the Yuan weakened against the U.S. dollar ahead of a meeting between U.S. President Joe Biden and Chinese President Xi Jinping, during which the two leaders are likely to discuss issues such as Russia's conflict against Ukraine and competitiveness between the two countries. Fears of future coronavirus lockdowns in Chinese cities, which could stymie economic growth, weighed on the Yuan, as did Beijing's pledge to implement monetary policy measures to stimulate the economy. Expectations of more monetary easing in China contrast dramatically with the U.S. Federal Reserve, which hiked interest rates for the first time since 2018 on Wednesday and outlined plans for future rate hikes. The Yuan has fallen 0.3% so far this week and is on track for its third weekly loss.


The Brazilian Real closed 0.76% on Thursday against the greenback. This happened as the U.S. dollar fell due to robust demand for risk in international markets, as investors processed monetary policy signals from both outsides and in Brazil. On the monetary policy front, the Central Bank's Monetary Policy Committee (Copom) voted to boost the Selic rate from 10.75% per year to 11.75% per year - a one percentage point increase to manage inflation. It marks the rate's ninth straight increase. High-interest rates in Brazil, as well as the gap between interest rates in the United States and other economies, have contributed to a flow of dollars into the country and an appreciation of the real in 2022. In other news, the Economic Policy Secretariat (SPE) of the Ministry of Economy reduced the forecast for a high GDP in 2022 from 2.1% to 1.5% and began to estimate a higher inflation rate of 6.55% for the year.


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