Daily Market Pulse

Dollar muted ahead of ECB’s decision


On Thursday, the U.S. dollar index fell back, erasing gains (0.28%) from the previous session, as traders weighed the Federal Reserve's hawkish plans against expectations that other major central banks will act more aggressively to catch up with inflation. The Federal Reserve of the United States is on track to raise interest rates by another 75 basis points next week, defying expectations of a larger 100 basis point increase. Meanwhile, the European Central Bank is expected to raise interest rates for the first time in 11 years later in the day with reports indicating that a more aggressive move may be considered. Elsewhere, Wall Street opened with modest gains, but U.S. indexes took a turn for the worse amid reports that major corporations are laying off workers.


Following a 0.46% decline, the Euro appreciated this morning, hovering around 2-week highs as investors braced for the first European Central Bank interest rate hike in eleven years and monitored energy supplies as Italy's political crisis worsened. The market consensus is for a 25 basis point increase, though bets on a larger 50 basis point increase have recently increased as the euro fell below parity with the dollar last week and June's inflation rate was confirmed at a new high of 8.6%. Simultaneously, the operator of Nord Stream 1 is resuming flows to Europe, and data show that flows increased from zero to 29,284,591 kWh/h in the early morning, as the key pipeline finished seasonal work today.


The pound sterling falls after losing 0.18% against the U.S. dollar yesterday. Investors remain cautious, focusing on corporate results as well as the European Central Bank's decision. The Conservative leadership election has been reduced to two candidates: Rishi Sunak and Liz Truss. One of them will take over as Prime Minister in place of Boris Johnson. Following a postal ballot completed by 160,000 Tory party members, the winner will be announced on Monday, September 5. In other news, the FTSE 100 traded flat on Thursday as caution dominated market sentiment in Europe's major bourses, with investors keeping an eye on the race for the UK premiership and Russian gas volumes.


After a marginal loss yesterday, the Japanese yen edged lower against the dollar on Thursday, hovering near its lowest levels in 24 years, amid a subdued market reaction after the Bank of Japan (BOJ) maintained ultra-low interest rates and signaled its commitment to keep policies accommodative despite a global shift toward tighter monetary settings. The BOJ maintained its -0.1% target for short-term rates and its 0% target for 10-year bond yields, as widely expected. The Board also raised its forecast for core consumer inflation for the current fiscal year while lowering its growth forecast for the same period, citing ongoing supply disruptions and higher commodity prices. Furthermore, the BOJ warned of "sharp volatility" in the currency market and its negative impact on the economy and prices.


The Canadian dollar remains subdued this morning, reflecting the cautious market mood, after falling 0.11% yesterday. In the most recent data releases, the yield on Canada's 10-year government bond fell to 3.02%, a level not seen since June 3rd, as investors digested inflation data amid a renewed appetite for safe-haven assets globally. The headline inflation rate in Canada rose to 8.1% in June, a new four-decade high, but fell short of market expectations and slowed more than expected on a monthly basis. Furthermore, producer prices fell in June compared to the previous month, ending a nine-month streak of increases, providing some relief to businesses, and potentially relieving pressure on Bank of Canada policymakers.


The Mexican peso fell 0.19% against the U.S. dollar this morning, extending its downward trend. Mexico's TIIE swap rates fell across the board on Wednesday, reflecting lower U.S. Treasury yields and a stronger peso; the curve expects about 200bps of rate hikes in the rest of 2022, with the policy rate ending the year at around 9.75 percent. In addition, the U.S. said Mexico's nationalist energy policies violate the North American free-trade agreement and has requested dispute-resolution talks under the agreement, according to a statement issued by the U.S. Trade Representative on Wednesday. In other news, Canada has announced that it will begin its own energy policy consultations with Mexico. According to Reuters, a spokeswoman for International Trade Minister


The Chinese yuan closed 0.26% lower against the U.S. dollar on Wednesday. In today’s session, the yuan fell against the dollar, close to a two-month low hit last week, as China maintained its zero-Covid policy and the property sector's crisis worsened. The Federal Reserve's hawkish stance on inflation fueled capital outflows on the mainland as well. This compelled the People's Bank of China to maintain its benchmark lending rates for corporate and household loans unchanged, a cautious approach in the face of signs of economic recovery, inflationary risks, and rising global interest rates. Meanwhile, China's growing trade surplus, which reached a record high in June, aided the yuan.


The Brazilian real continues with its bearish trend by closing 0.70% lower and trades near the level last seen in mid-January of this year. The retraction reflected the extension of the gains of the American currency abroad, which was gained on the currencies of developed and emerging countries. The prices of commodities remain mixed and bond and equity markets continue extremely volatile. Also, highlighted here is once again the behavior of the short and medium-term interest rates curve (swaps rates) that maintain an upward bias, as traders price higher fiscal risk amid escalating yields of American bonds. The behavior of the yield curve directly implies the cost of hedging.


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