Daily Market Pulse

Dollar finds its footing early Wednesday

7 minute read


The U.S. dollar appears to have found its footing early Wednesday amid rising U.S. Treasury bond yields. The U.S. dollar index, which fell 0.78% yesterday and had finished in negative territory for the previous three days, is gaining ground this morning. Following a 4% spike on Tuesday, the benchmark 10-year U.S. Treasury note yield is trading sideways within a close area of 3%. Meanwhile, at a Wall Street Journal event, Fed Chairman Jerome Powell highlighted that if they sense the need to lift the rate beyond neutral, they will not hesitate and that there is strong support among policymakers for 50 basis point rate hikes in the next two policy meetings. Equity markets were favorable until yesterday and the U.S. futures dipped this morning following Fed Chair Powell's hawkish comments. Moving forward, traders will be looking for new impetus through the releases of house starts and building permit figures. 


The common currency gained 1.11% yesterday before losing its ground this morning as the Fed's aggressive statements on rate hikes weakened risk sentiment.  The Euro appreciated as traders are boosting bets for higher borrowing costs after European Central Bank (ECB) policymaker Knot said the central bank should not rule out a 50bps rate hike in July and ECB Villeroy de Galhau warned a lower Euro could threaten the ECB's efforts to steer inflation towards its target. Money markets are already pricing in 105 basis points of ECB rate hikes by the end of the year, up from approximately 95 basis points earlier in the week. Meanwhile, the Eurozone economy gained 0.3% in Q1, somewhat higher than a preliminary reading of 0.2%, but the European Commission reduced its growth prediction for the union to 2.7% this year, down from 4.0% in February. In other news, European stocks struggled to build on Tuesday's rise as traders weighed hawkish comments from Federal Reserve Chair Jerome Powell and the latest inflation and economic activity statistics. 


The Pound sterling soared 1.41% yesterday, capitalizing on improved risk appetite before retreating on Wednesday morning following the release of inflation data. The British pound fell near to two-year lows reached the previous week, as investors remain concerned about stagflation or even recession risks, as inflation rates reached levels not seen since 1982, the economy contracted in March, and consumers' purchasing power remains squeezed. Having said that, the annual inflation rate in the United Kingdom surged to 9% in April, the highest level since 1982, due to increased prices for electricity, gas and other fuels, motor fuels, and used cars. This imposes further pressure on the Bank of England, which already hiked borrowing prices four times, but more rate hikes are unlikely due to growth concerns. In other news, the FTSE 100 fell marginally on Wednesday after three straight days of gains, as investors balanced company earnings against the risk of inflationary pressures.


The Japanese Yen closed 0.17% down in the previous session against the greenback before recovering its losses partially this morning. In the latest data releases,  The Japanese economy declined 0.2% year on year in Q1 2022, contrary to the market consensus of a 0.4% drop and following a downwardly revised 0.9% increase in Q4. This was the second contraction in three quarters, owing to restrictions imposed by the Omicron variant, the impact of the Ukraine crisis, an increase in imports as a result of the weak yen, and rising commodity costs. However, Industrial production in Japan increased by 0.3% month on month in March 2022, matching the flash number and down after a 2.9% growth the previous month. In other news, the Nikkei 225 Index rose 0.94% on Wednesday, while the broader Topix Index rose 0.96%, extending gains from the previous session after data showed Japan's economy contracted less than expected in the first quarter, keeping investors focused on other factors.


The Loonie gained 0.27% in the previous session against the greenback before edging lower this morning ahead of the release of key Consumer Price index data. The risk appetite held off following the hawkish comments by Fed chair Powell, which undermines the Canadian currency. Meanwhile, foreign investors purchased CAD 46.9 billion in Canadian securities in March 2022, up from CAD 7.5 billion the previous month. It was the 20th consecutive month of net foreign purchases, and the second biggest on record, trailing only April 2020. Way ahead, Investors will be watching for the release of Canadian inflation data, which is predicted to be 5.4% on an annual basis in April. 


The Mexican Peso advanced 0.43% in the previous session and appears to be nudging higher this morning. The Mexican Peso rose to a four-week high for the first time since April 18th, mirroring a weaker U.S. currency. The U.S. Dollar Index plunged for the third day in a row, hitting the worst drop in months on Tuesday on heightened risk appetite among investors. Meanwhile, the Mexican central bank raised interest rates to 7% for the eighth time in a row on May 12th, citing inflationary pressures from the Russia-Ukraine conflict and prospects of quicker global monetary policy tightening.


The Chinese Yuan closed 0.60% higher in the previous session against the greenback. In the latest news, the average new home prices in China's 70 largest cities increased by 0.7% year on year in April 2022, following a 1.5% increase the previous month. This was the slowest increase in new home prices since October 2015, when Beijing's deleveraging policy caused a liquidity problem among several large property developers. Elsewhere, the Shanghai Composite slid 0.25% on Wednesday, while the Shenzhen Component fell 0.2%, giving back some of the previous session's gains due to a lack of new catalysts to push mainland stocks higher. However, investors anticipate additional market volatility as a result of domestic policy uncertainties, aggressive global rate hikes aimed at containing inflation, and concerns about a global economic slowdown.


The Brazilian currency continued to advance in the positive territory this past Tuesday and closed 1.28% higher, supported by the gradual resumption of economic activities in China, as well as the second round of inflationary indicators. Although the market has priced a gradual end of restrictions against Covid in Shanghai, new outbreaks of Covid in the country were registered in the last 24 hours. This morning, the local media warned about new outbreaks in major Chinese cities and the continued spread of the Covid-19 in Beijing, which are raising prospects of new stricter restrictions, even as Shanghai slowly eases from its six-week lockdown. Meanwhile. foreign managers hold US$ 27.6 billion in long positions in U.S. dollars through derivatives, while local funds hold $3.84 billion. Both positions haven't changed much this month, despite the 1.8% depreciation of the BRL in the month to date.


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