Daily Market Pulse

U.S. dollar steps back amid cautious optimism


The U.S. dollar index, which benchmarks the performance of the greenback against a basket of six major currencies, fell 0.21% during yesterday’s trading session amid a broader risk-sensitive mood triggering flows, which influenced financial markets. The mood remains cautious during the early hours of Wednesday as investors await inflation readings from the Eurozone and Canada, while participants diggest the U.K. inflation reports. The Consumer Price Index in the U.K. surprised on the downside, posting 3.1% on a yearly basis in September from 3.2% in August. Core readings declined to 2.9% in the same period, lower than its previously anticipated rate of 3%. Moreover, U.S. Treasury yields pushed higher before the close of yesterday’s session, gaining more than 2% and today, treasuries stay relatively calm around 1.65%, helping the dollar stay resilient. However, equity markets in the U.S. remain solid, with the S&P index closing its fifth consecutive session recording gains and reaching its highest level since early September. The Dow Jones Industrial Average advanced 0.55% and Nasdaq capitalized 0.7%. However, U.S. data showed on Tuesday that Housing Starts and Building Permits declined by 1.6% and 7.7% respectively in September. Today, market participants keep a close eye on the release of the Federal Reserve’s Beige Book, which will provide a good overview of the U.S. economy. 


The common currency reached a three-week high consolidating gains against a subdued dollar, which keeps being supported by climbing U.S treasury yields. However, the Euro lost momentum through the course of Tuesday’s session, following comments from European Central Bank chief economist Philip Lane flagging that markets may not have fully absorbed the ECB’s forward guidance, making it difficult to reconcile market-rate pricing with the guidance from policymakers. However, a scent of cautious optimism is driving the market appetite amid hopes that the U.S. stimulus is nearby and hopes of overcoming China-linked fears seem to be underpinning the risk-on mood and weakness of the greenback. Today, market participants eye the Eurozone Consumer Price Index, which is expected to rise from 0.4% to 0.5%, alongside Germany’s Producer Price Index, likely to rise to 12.7% from 12% previously reported. However, major attention will be given to the comments from ECB and Fed officials, lined up for release during the day. 


The British Pound capitalized 0.49% against the dollar during yesterday’s trading session amid expectations of U.K. inflation reading, which have driven policymakers to toy around with interest rate hike expectations before the end of the year. The U.K. inflation figures, reported during the early hours of today’s session, revealed that inflationary readings rose by 3.1%, while market participants expected 3.2%. The core inflation gauge (excluding volatile food and energy items) fell to 2.9% annualized versus 3.1% registered in August, falling short of the consensus forecast of 3.0%. Cable failed to react amid the soft inflation results, which begs the question of whether inflationary pressure really requires tightening of monetary policy from the Bank of England, or if current inflation is actually as transitory as initially believed. Now, all eyes will sit on Andrew Bailey, governor of the Bank of England, and upcoming manoeuvers from policymakers.    


The Japanese Yen retraced 0.33% against the dollar during the early hours of Wednesday's trading session amid sustained U.S treasury yields trading at 1.65% for the first time since May. Investors continue to anticipate the Fed’s tapering next month amid rising inflationary pressure and soaring energy prices. The weaker housing data dented the sentiment, which kept the greenback capped. Moreover, the Japanese Yen remains on the backfoot on fragile improved risk sentiment, weighing on its safe-haven appeal. On the data front, Merchandise Trade Balance expanded its deficit amid imports growing at a faster pace than Exports, although both readings exceeded market expectations. The Japanese imports grew 38.6% in the past year, significantly higher than 34.4% previously anticipated, while Exports reported 13% annualized growth, above its 11% market consensus.    


The Loonie is looking to capitalize against the dollar amid the greenback’s weakness, sponsored by firmer risk sentiment, sustained crude oil prices, and expectations ahead of highly expected inflationary reports from Canada. The Loonie sustained pressure over the greenback as economic data showed that the country’s economy added thousands of jobs in September, while the unemployment rate declined. Additionally, the West Texas Intermediate surged to the highest level in more than 7 years, changing hands above USD 80 per barrel, underpinning the Loonie given the import volumes of oil that Canada pumps every day, selling millions of barrels a day as it is the fourth biggest producer in the world. However, market participants’ eye inflation reports and expectations are set that the country’s inflation number will hold steady in September, expected at 4.3%. This should be a slight increase of 4.1% in August, and it is still well above the BoC target of 2%.  


The Mexican Peso rallied 0.71% during yesterday’s trading session, amid a firmer risk sentiment and a broader weakness of the dollar despite soaring U.S. treasury yields. Moreover, the finance and public credit committee from the Chamber of Deputies has approved the draft revenue budget, which defines next year's budget proposal with 24 votes in favour and 17 against.  The bill plans to increase by 8.6% in government revenue in 2022. Opposition lawmakers expressed concern that the projected government income is overly ambitious and that the bill should be voted upon by the Chamber plenary. 


The Chinese Yuan rallied 0.70% against the greenback in Tuesday’s trading session amid a softer dollar, ahead of the Peoples Bank of China (PBoC) interest rate decision. Following the worse than expected growth figures on Monday, the PBoC decided to leave its one-year prime rate unchanged at 3.85% as expected. Market participants have eased expectations that China’s central bank will ease monetary policy by cutting the number of cash banks need to hold in reserve, according to reports from policymakers. The factory gate prices rose by 10.7% in September, reducing pressures from policymakers to lose monetary policy despite fears of stagflation. 


The Brazilian Real extended losses against the dollar, reaching 6 months lows amid rising U.S. Treasury yields and political turmoil in the country. Economists in Brazil warned that the slowdown in China will be felt particularly strongly in the commodity-exporting country. Reports suggest that the Brazilian economy will contract 0.3% for every percentage point fall in China’s Gross Domestic Product, looming out growth prospects in the country, as China reported 4.9% growth vs 7.9% of the second quarter.   


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