Daily Market Pulse

Dollar set to end six-week advance


The U.S. Dollar Index registered its largest one-day drop since early March, losing 1.07% on a daily basis on Thursday. The sharp drop in U.S. Treasury bond yields made it harder for the greenback to find demand. The benchmark 10-year U.S. Treasury note yield fell to 2.77% on Thursday, its lowest level in over a month, before recovering. Meanwhile, investors are growing increasingly concerned about the U.S. economy entering a recession, with the Federal Reserve continuing to tighten even as consumer activity weakens. As a result, investors flocked to the safety of Treasury bonds, driving yields and the dollar currency lower. Markets remain relatively calm early Friday, but U.S. stock index futures trade decisively higher, indicating an improving market attitude ahead of the weekend.


The common currency surged 1.18% yesterday, reaching its highest level in two weeks, as a result of the selling pressure surrounding the dollar. This morning, the Euro slows marginally ahead of the release of consumer confidence statistics. Meanwhile, at its April 2022 meeting, the European Central Bank (ECB) maintained record low-interest rates and confirmed that monthly net purchases under the (Asset Purchase Programme) APP will expire in the third quarter, with interest rates only rising thereafter. Furthermore, the central bank stated that the forward guidance requirements for a hike in key interest rates will be critical for the policy discussion at the June meeting. Having said that, money markets are now predicting the first rate hike in July 2022. In other news, European stocks rose Friday after China's newest stimulus package injected a dose of hope at the conclusion of another turbulent week for global markets.


The British Pound extended its weekly rebound to gain 1.02% in the Thursday session before consolidating its gains this morning following the release of dismal consumer confidence data. With that said, the UK consumer confidence has plummeted to its lowest level in at least 48 years, with consumers feeling more pessimistic than during the 1970s energy crisis. With this, the outlook for consumer spending remains subdued as high inflation is hurting the purchasing power. This could give the Bank of England reason to move cautiously when raising interest rates further. Meanwhile, the retail sales in the United Kingdom unexpectedly gained 1.4% (mom) in April 2022, rebounding from dips in the previous two months and surpassing market expectations of a 0.2% drop. In other news, the FTSE 100 climbed more than 1.5% on Friday, snapping a two-day losing streak after data showed retail sales rose unexpectedly in April and China dropped its five-year lending prime rate by 15 basis points.


The Japanese Yen closed 0.34% higher in the previous session against the greenback before easing in Friday's session. The Yen rose to levels not seen in a month as investors flocked to the safe-haven currency in response to widespread risk aversion and a deteriorating global economic outlook. In terms of the latest data, Japan's consumer prices increased by 2.5% year on year in April 2022, the most since October 2014, following a 1.2% increase the previous month. This marked the eighth consecutive month of annual inflation, with food prices growing at the quickest rate in seven years. Also, core consumer prices rose 2.1% year on year, the eighth straight month of increases and the most since March 2015, meeting projections and exceeding the Bank of Japan's 2% target for the first time in seven years. The rise in consumer prices presents a challenge to Japan's central bank, which has maintained its enormous monetary stimulus as it strives to maintain inflation at 2% on the basis of solid wage growth. 


The Loonie advanced 0.50% yesterday against its U.S. counterpart and continued to post modest gains on Friday morning. The Loonie has remained buoyant due to the market's positive risk sentiment this morning. Meanwhile, producer prices in Canada rose 0.8% month over month in April 2022, slowing from a downwardly revised, 42-year high, 3.4% increase the previous month but exceeding market expectations of a 0.5% rise. It was the eighth consecutive monthly increase, with the main upward pressure coming from energy and petroleum products, mostly due to skyrocketing jet fuel prices and record-low inventory levels in the United States during the month. In other news, Prime Minister Justin Trudeau's government has joined Canada's closest intelligence allies in prohibiting Huawei Technologies Co. from operating fifth-generation wireless networks.


The Mexican Peso took advantage of the weak dollar and advanced 0.59% before losing its momentum this morning. In the last session, the Mexican Peso rose to a four-week high after a drop in the U.S. dollar and a rise in metal prices. The dollar index fell below 103 for the first time in two weeks as weakening economic data fueled growth fears amid increasing inflation and aggressive monetary tightening plans. Furthermore, Mexico is a significant metals exporter, and a rise in metal prices boosted the Peso amid expectations that lockdowns in top commodities consumer China would be eased. 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 0.74% higher in the previous session against the greenback. Domestically, the People's Bank of China held its key rates for corporate and household loans stable in May, but trimmed the mortgage reference rate for the second time this year, amid a downturn in the Chinese economy caused by the biggest Covid epidemic in over two years, a housing crisis, and sluggish lending demand. The one-year LPR (Loan Prime Rate) remained constant at 3.7% after cuts of 5 and 10 basis points in December and January, respectively, while the five-year LPR was reduced by 15 basis points, the most since the rate was revised in 2019, to 4.45%. The credit guidance comes as central bank statistics revealed that new bank loans in China fell to their lowest level in more than four years in April. Banks in numerous Chinese cities slashed mortgage rates in the first quarter in response to government requests to boost buyer sentiment.


The Brazilian currency continued to register profits yesterday and closed 0.16% higher. The move was again prompted by the weakness of the U.S. dollar abroad, impacting positively G10 and emerging currencies. On that note, the dollar appears to be losing steam in these last few sessions after Fed chairman Jerome Powell commented on Tuesday, which indicated that the Fed is committed to the tightening cycle and might even go beyond the neutral rate until inflation starts to decline. This led markets to price a more aggressive pace of liquidity withdrawal, in turn, raised concerns about the economic recession. Elsewhere, the economic calendar today is quite light, with Tax Revenue Federal for April on the radar. However, what will be highlighted (although it´s likely to have no impact on the BRL) is the possible meeting between President Bolsonaro and Elon Musk this Friday.


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