Daily Market Pulse

Dollar pullback amid retreating yields


The US dollar index, which measures the greenback's performance against a basket of six major currencies, retreated 0.31% during Thursday’s trading session following the 2021 highs underpinned by a surge in the U.S. treasury yields. A slight pullback after an impressive rally is owed to U.S. treasury yields which now consolidate 3.4% lower on Thursday’s start, which made it challenging for the greenback to outperform its peers. The dollar fundamentals continue to underpin the greenback’s momentum amid Biden’s progress on the infrastructure bill, strong Retail Sales reading beating expectations, and a pickup in labor markets. Today, investors will be keeping an eye on the Initial jobless claim and Philly Fed index, which might bring renewed impetus to the dollar. However, the trading action remains subdued on early Thursday and the risk sentiment is expected to drive the markets ahead of the macro-economic data release. Against the greenback’s dip, S&P 500 showed slight losses while US stock index futures are edging higher in the European trading session, advancing to improve market mood.  


The Euro managed to gain 0.47% against the greenback today after plummeting to 16-month lows yesterday. However, it seems difficult for the Euro to back on bullish momentum. The tepid market mood, amid inflation concerns and rising covid-19 cases, puts a negative sentiment around the Euro. Additionally, the dovish stance by the European Central Bank’s (ECB) policymakers weighs on the Euro as the monetary policy divergence comes to the fore. Investors are interested in upcoming PMI and IFO surveys data next week, which, if strongly printed, can provide the impetus for the currency pair. Market participants are cautious about rising Covid cases that can impact the survey and add further pressure to the Euro. 


The Sterling managed to advance 0.07% today against the greenback in the European trading session after gaining momentum from hotter-than-expected CPI data yesterday. The currency pair built momentum on the Bank of England’s rate hike assurance and gained support for upside traction. Retreating U.S. bond yields by 3%, which dragged the dollar away from its 16-month peak, also provided support for the Sterling. The upside potential for the currency pair remains limited due to cautiousness around Article 16 of the Northern Ireland protocol amid Brexit talks. Additionally, no progress over post-Brexit fishing rights also added further pressure to the currency. In absence of major economic data release in the UK, investors are waiting for upcoming Brexit-related headlines to drive the market sentiments. 


The Japanese Yen managed to gain slight positive traction during the European trading session today. Today’s uptick reverses yesterday’s currency pair retracement from multi-year highs due to sliding U.S. yields. The prospects of an early rate hike by the Fed are seen as providing support for the greenback against the yen. Cautious market mood amid high inflation and retreating U.S. bond yields proved to be a safe haven for the Japanese Yen. Market participants are looking forward to the Philly Fed index and Initial claims data, along with New York Fed president John William’s speech, which will influence the dollar and provide impetus to the currency pair in the North American trading session.


The Loonie currency pair edged lower 0.09% against the greenback today during the European trading session. The minor drop comes after the market hit a six-week high early Thursday, driven down by falling U.S. Treasury bond yields. The weigh down is also bolstered by the release of slighter softer expected inflation data, at 4.7%, and a correction lower for the oil prices. However, market participants anticipate that the Fed’s hawkish stance and broad-based dollar strength are the main market drivers, rather than the temporary correction in oil prices. Furthermore, further decline in oil prices might weaken the Loonie and provide support for the dollar. The Bank of Canada has announced plans for the first-rate hike in Q2 2022. Market participants will take cues from oil price dynamics and economic data release to find short-term trading opportunities around the currency pair.  


The Mexican Peso has gained 0.31% in the early trading session today, providing support in favor of the greenback following yesterday’s marginal fall. The strong U.S. dollar across the board continues to be the key driver. A big question of Pemex’s debt burden remains unsolved, which will have a significant impact on the Bond and FX market. Economists anticipate that the downward pressure on currency and bond yields will remain till 2023. Domestic policies, energy sector policies, trade dynamics, and the Banxico policy stance will shape the near-term currency movement.


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 the 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. 


The Real closed down 0.48% on Wednesday, amid rising bets of monetary tightening earlier than expected in the United States, escalating new cases of Covid-19 in Europe, as well as uncertainties about the country's fiscal health. Additionally, market participants continue to price a new increase of 150bps (60% odds) in Selic at the next Copom meeting, scheduled for December 8. In the background, the recent statement by President Bolsonaro suggesting that the bill ¨PEC dos Precatórios¨ should include a potential salary adjustment for public employees was not well received by market players. If the proposal is changed in the Senate, it must be voted on in two rounds again in the Chamber of Deputies, causing an even greater delay. Nonetheless, given that the Brazilian real has some correlation with future metal prices, one of the main exports of the country, it is surprising how the BRL is still holding strong against the recent falls in iron ore prices (-60% since July) and copper (-10% last 30 days).


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