Daily Market Pulse

Positive risk complex weighs on the Dollar

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.33% lower and erased the previous week’s gains. The greenback began a consolidation phase early this morning and appears to be holding back amid a favourable risk complex. The risk-averse market sentiment made it harder for the dollar to find demand, and the benchmark 10-year U.S. Treasury bond yield fell below 1.8%, further weighing on the currency. Furthermore, the dollar was under pressure from a comeback in stocks, with the major U.S. averages rising for the third day in a row. Following a roughly 2% gain on Monday, the S&P 500 Index opened slightly lower on Tuesday but closed the day in positive territory. U.S. market index futures are up between 0.1% and 0.35% this morning. Moving forward, market participants will be watching for ADP's private-sector jobs report, which is expected to drive the U.S. dollar index price higher ahead of Thursday's highly anticipated central bank meetings.


The Euro closed 0.33% higher and continues its uptrend this morning. Since Friday, the common currency has advanced continuously on the back of the deep correction in the U.S. dollar, recouping about half of the selloff seen in the second half of January. The robust comeback in the Euro coincides with a more convincing bounce in the yields of the German 10-year Bund yields to the positive area, as they managed to touch the 0.05% level on Tuesday for the first time since April 2019. Meanwhile, the Eurozone unemployment rate fell to a record low of 7% in December 2021, down from a downwardly revised 7.1% in November, and slightly below market predictions of 7.1%, as labour demand continues to rise amid the continued economic recovery. Moving on, the focus will be on the announcement of the final inflation data for the month of January in the broader Eurozone, which is predicted to be 4.4%.


The Pound Sterling closed 0.56% higher followed by consolidating its gains  Wednesday morning. The major currency extended its current recovery from a two-month low reached last week, gaining traction for the fourth day in a row on Wednesday. The British pound has continued to benefit from anticipation that the Bank of England will raise interest rates at its next meeting. The U.S. dollar, on the other hand, was pulled down by less hawkish comments from Fed members, which pushed back against market expectations for a 50 basis point rate hike in March. The mix of supporting factors served to offset the UK political drama and kept the Sterling strong. Meanwhile, the Bank of England is set to publish its policy decision on Thursday. Market investors are already fully pricing in a 25 basis point rate hike, this would be the first back-to-back hikes since 2004. Going forward, the U.S. ADP report on private-sector jobs, which is published later this Wednesday, may influence US dollar price dynamics and provide some trading impetus to Sterling.


The Japanese Yen closed 0.35% higher before posting modest gains on  Wednesday morning. The Japanese Yen rose for the fourth day in a row as U.S. Treasury yields fell and the U.S. dollar fell in general. Furthermore, Fed officials minimised the possibility of a 50 basis point rise in March, which boosted the Yen. In fact, St. Louis Fed President James Bullard stated that a more aggressive policy reaction was not in his favour. In addition, the tension between Russia and the West over Ukraine continued to strengthen the safe-haven Japanese Yen. Meanwhile, the Bank of Japan has consistently stated that its relentless and forceful monetary easing will continue until further notice. As a result, Yen traders should exercise caution. Going forward, in the absence of any important events from Japan's economic calendar, traders will be waiting for U.S. data releases to impact Yen prices further.


The Loonie closed 0.17% higher followed by consolidating its gains on Wednesday morning. The commodity-linked Loonie gained ground versus the U.S. dollar on Tuesday, backed by strong GDP figures and slow manufacturing activity. In November 2021, the Canadian economy grew 0.6% month over month, following a 0.8% gain in October and exceeding market estimates of a 0.3% increase. It was the sixth straight month of growth, with both the goods-producing and service-producing industries increasing. Furthermore, the IHS Markit Canada Manufacturing PMI fell to 56.2 in January 2022 from 56.5 in December, the lowest figure since July 2021. Nonetheless, the sector expanded for the 19th straight month in January, supported by increased levels of new work. Aside from that, rising crude oil prices continued to strengthen the commodity-linked Loonie, bolstering the currency even more. Market players are now anticipating headlines from the OPEC+ meeting and the speech by Bank of Canada Governor Macklem. This, together with the release of U.S. statistics, will drive Loonie prices further.


The Mexican Peso finished 0.45% higher before consolidating its gains this morning. The Mexican peso rose against the U.S. dollar in yesterday's session, after falling to a near 6-week low on January 28th, due to a weaker U.S. dollar and strong crude oil prices. Domestically, inflation statistics and the most recent Central Bank minutes bolstered the case for higher rates, with bets centered on another 50 basis point hike during the February meeting. Meanwhile, preliminary statistics suggested that the Mexican economy entered a technical recession in the fourth quarter of 2021 after falling 0.1% quarter on quarter, which could weigh on the Central Bank's decision to maintain its current rate of policy tightening. In other news, the IHS Markit Mexico Manufacturing PMI decreased to 46.1 in January 2022 from 49.4 the previous month, indicating a decline in the sector's health. The latest result indicated the 23rd straight month of factory activity reduction, and the worst since March 2021, as businesses reported a steeper decline in output and new orders amid decreased international demand.


The Chinese Yuan remained flat on Tuesday amid the Chinese new year holidays. As Chinese financial markets remained closed for the week-long Lunar New Year vacation, the Yuan held steady against the US dollar in low-volume trading. The Yuan has gained modestly this week as the dollar has fallen after Federal Reserve officials resisted predictions of a 50 basis point rate hike in March. Meanwhile, the Chinese currency remained under pressure due to widening policy divergence, as impending rate hikes in the U.S. contrasted with China's monetary easing. The People's Bank of China has reduced many major short and medium-term interest rates, with experts anticipating additional easing measures in the coming months, including a 50 basis point reduction in the reserve requirement ratio.


The Brazilian Real closed 0.51% higher against the greenback on Tuesday. The Brazilian Real soared to four-week highs against the U.S. dollar, owing to a weaker currency, higher iron ore prices, and forecasts of higher local interest rates. Iron ore, a crucial export for Brazil, has risen to more than $140 per tonne, the highest level since the beginning of September 2021. Domestically, hotter-than-expected mid-month inflation statistics bolstered the case for The Central Bank of Brazil to adopt a more hawkish policy stance. According to mid-month consumer pricing statistics, the annual inflation rate remained above 10%, exceeding market estimates and the central bank's objective of 3.5%. In other news, the IHS Markit Brazil Manufacturing PMI fell to 47.8 in January 2021, after lingering at 49.8 for two months, confirming the sector's contractionary trend. Moving forward, market participants anticipate another 150 basis point boost from the Central bank during its monetary policy meeting later today.


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