Daily Market Pulse

Dollar calmed after a surge yesterday

6 minute read


After an impressive rally yesterday (0.76%), the U.S. dollar has lost its recovery mode in early European hours today, despite treasury rates riding higher near multi-year highs. The U.S. treasury yields have risen sharply in response to the Fed's policy differences with the majority of the world's central banks. The tide swung against dollar bulls after U.S. S&P 500 futures rose on fresh hope that China might abandon its zero-covid policy. However, investors remain wary in the face of rising bond yields and simmering U.S.-China tensions over Taiwan and chip manufacturing. Markets are currently pricing in another 75 basis point rate hike next month, bolstered by a chorus of hawkish pronouncements from U.S. policymakers hinting at an even higher peak for rates.


After being pushed down yesterday (0.86%), the Euro is attempting a little rebound this morning, aided by the decline in the U.S. dollar, but higher treasury yields continue to constrain upside attempts. Meanwhile, high factory-gate inflation in Germany boosts arguments for the European Central Bank (ECB) to raise interest rates by 75 basis points next week, boosting the common currency. According to the most recent data, the Eurozone had a current account deficit of EUR 20.21 billion in August 2022, compared to a surplus of EUR 21.05 billion in the same month the previous year. In other news, Euro is increasing its imports of cheap Ethanol from Brazil in an effort to alleviate its hot energy market crisis.


Following a 0.89% drop yesterday, the British Pound recovers after Truss resigns. According to recent developments, Britain's Interior Minister Suella Braverman's surprise resignation weakened Prime Minister Liz Truss' leadership authority. Truss plans to remain until a replacement is selected. Elsewhere, the UK's 40-year high inflation rate continues to create doubt on the Bank of England’s (BOE) next policy decision, maintaining the Pound's bearish bias.


For the first time since August 1990, the Japanese Yen fell to a critical low against the U.S. dollar, fueling fears that the government might once again interfere in currency markets to defend the Yen. Japanese authorities have repeatedly warned against speculative currency swings and threatened future action, but they have refused to comment on whether the government has intervened covertly. Last month, Japanese authorities staged their largest-ever currency intervention to stabilize the swiftly sinking Yen, spending 2.84 trillion Yen for efforts that generated just a temporary benefit. The Yen is down 30% versus the dollar this year amid dovish policy by the Bank of Japan against the hawkish Federal reserve.


In the face of a weak dollar, the Loonie regained traction this morning after falling 0.20% on Wednesday. Yesterday, the Loonie fell and hit a two-year low, owing primarily to a strong dollar as investors digested the new inflation report. Annual consumer inflation in Canada fell for the third month in a row to 6.9% in September, but it was still somewhat more than expected as food costs continued to rise. Following the data, money market bets shifted to a 75 basis point rate hike by the Bank of Canada on October 26th, up from a previous consensus of a 50 basis point increase. In addition, the Q3 Business Outlook Survey found that businesses' inflation estimates increased to 7.11% from 6.82% in Q2, with the CPI predicted to be 5.22% in two years. Nonetheless, five-year projections have dropped to pre-pandemic levels.


The Mexican Peso fell (0.44%) for a second day on Wednesday as two, and five-year U.S. treasury rates rose to their highest levels since 2007, sending the dollar higher. On Wednesday, Mexican swaps rose across the board as U.S. yields rose; the TIIE curve prices in around 120bps of rate hikes in the rest of 2022, bringing the policy rate to just under 10.50%. Meanwhile, Deputy Governor Gerardo Esquivel stated yesterday that Mexico's central bank can begin thinking about decoupling its monetary policy decisions from the Fed now that inflation appears to have peaked in August. He also stated that Mexico is currently in a better position to achieve convergence than the United States. In today’s session, Peso is erasing its losses and clocking gains amid the subdued dollar.


The Yuan gained ground against the U.S. dollar today, boosted by news that China was considering relaxing Covid-19 restrictions. According to Bloomberg, Chinese officials are contemplating whether to shorten the mandated quarantine time for people arriving in the country from 10 days to 7 days. The Yuan was also bolstered by the central bank's decision to maintain its benchmark lending rates steady in order to counteract any currency depreciation and avoid additional policy divergence with other major countries. Meanwhile, downside risks from aggressive international monetary tightening and a worsening domestic economic outlook persist. Investors are also waiting with bated breath for a slew of Chinese economic data that have been postponed due to the upcoming Communist Party Congress.


The Brazilian Real closed 0.59% down Wednesday, with inflation statistics from Europe and Covid-19 instances in China weighing on the market's attitude, which favored the dollar. Domestically, Brazilian Economy Minister Paulo Guedes stated that if the existing liberal economic framework is maintained, the country may expand at a rate of 4% per year for the next ten years. In addition, the Fundaço Getulio Vargas (FGV) released the August GDP Monitor yesterday. According to the institution's research, the Brazilian economy contracted by 0.8% in that month compared to July, owing to a drop in family spending. Elsewhere, market participants are still focused on the ongoing electoral race for the Republic's Presidency in the second round.


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