Daily Market Pulse

U.S. dollar shows resilience under risk-on pressure

6 minute read


The greenback is struggling to find some traction against most of its peers amid the positive risk sentiment in financial markets. The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, extended new weekly lows during the early hours of the trading session, and it now attempts a shy bounceback amid sustained U.S Treasury yields (1.65%), which continue to support the currency. Yesterday, the Federal Reserve released its Beige Book, reporting that the U.S. economy continued to grow at a “modest to moderate” pace in September and early October. Many firms raised selling prices, indicating greater ability to pass along cost increases to customers amid strong demand. Equity indexes gained off the back of the risk-on mood, with S&P climbing 0.37% and staying close to its record high set back in September. The Dow Jones Industrial Average rose 0.43%, and the Nasdaq Composite closed virtually unchanged, suggesting that the real economy is the one picking up. Coming up, weekly U.S. initial jobless claims, Existing Home Sale, and Philadelphia manufacturing survey will provide renewed impetus to the greenback.  


The EUR attempted to extend gains against the dollar during the early hours of the trading session, flirting with monthly highs before losing momentum amid sustained U.S. treasury yields. On Wednesday, the final reading of the bloc’s Consumer Price Index (CPI) for September grew past 0.4%, expected to be at 0.5% on a monthly basis, while matching the 3.4% annualized forecast. Following the release of firm inflation readings, ECB’s Francois Villeroy de Galhau and Pierre Wunsch tried their best to defy the monetary policy tightening, although both failed to convince market participants as policymakers now struggle to tame hawkish bets. Market participants now turn their focus to preliminary Consumer Confidence reading for October to get a feel of morale amid ECB, China, and the energy crisis. 


The Pound Sterling closed 0.22% higher against the dollar during yesterday’s trading session, amid a broader risk-on sentiment in global markets. However, uncertainty seems to have cooled down the party for Sterling buyers as it retraced 0.13% during the early hours of Thursday amid U.K inflation figures missing inflationary expectations, capping the upside potential of cable. The weaker than expected Consumer Price Index results reduces the odds of the Bank of England hiking rates, which has been a solid support for Sterling to recover during the past sessions. The British pound may struggle if the weaker than expected figures become a catalyst for the market to run more “sane” over expected interest rate hikes and monetary policy tightening. Coming up, Sterling investors will stay turned to the upcoming GfK Consumer Confidence, which will provide a useful insight into the market morale in the United Kingdom.     


The Japanese Yen extended losses, suffering from its yield differentials and reaching a fresh five-year low against the dollar. The Japanese Yen has depreciated over 5% in the past four weeks, amid rising U.S. Treasury yields widening the yield differential between currencies and poor performing economic indicators in Japan, in addition to political uncertainty ahead of general elections. The Federal Reserve’s hints towards tapering have been pushing Treasury yields to 1.65%, levels last seen since May, while the Japanese 10-year note remains near zero through a yield control curve squeezing attractiveness away from the currency. 


The Loonie extended short-lived gains during the early hours of the trading session, reaching June prices before the dollar pulled back amid sustained U.S. treasury yields showing resilience on the back of the greenback. Canadian authorities released inflation reports on Wednesday, showing that the Consumer Price index climbed to 4.4% from 4.1%, beating the market expectations set at 4.3% during yesterday’s trading session. Meanwhile, the Bank of Canada (BoC) preferred gauge of inflation (BoC Core CPI) rose to 2.67% from 2.56%. The higher than expected inflation figures are echoed in the latest BoC Business Outlook Survey, while a strong labor market report is likely to see a more optimistic BoC forecast at next week’s meeting, with another QE tapering expected to go ahead as planned. 


The Mexican Peso erased yesterday’s gains during the early hours of the Thursday session amid resilient U.S. Treasury yields capping the recovery of the Latin American currency. Two presidential candidates in line to succeed current president Andres Manual Lopez Obrador (AMLO) were involved in building Line 12 of the Mexico City metro, which, after the disastrous collapse of an elevated section, claimed 26 lives. Although presidential elections will not be held until two and half years from now, Marcelo Ebrard and Claudia Sheinbaum are against the ropes and might miss the opportunity to succeed current President AMLO due to the scandal. 


The Chinese Yuan stepped back after its strong rally during Tuesday’s session, as U.S. treasuries make room for the greenback to recover progressively. The Evergrande crisis continues to unfold, as shares of the real estate giant resumed trading during yesterday’s trading session falling over 14% after authorities froze trading ahead of the acquisition announcement. The real estate firm Hopson Development was keen to acquire a 51% stake in Evergrande’s property service unit, although the deal didn’t go through as the executives failed to reach a consensus. 


The Brazilian Real remained subdued against the dollar amid sustained U.S. Treasury yields and looming growth prospects from China, which undermined the demand of commodity producers like Brazil. Moreover, the National Agency of Oil (ANP) announced that the country does not have a short-term risk of fuel shortages. Comments from authorities come after state-owned company Petrobras said that demand for November exceeds its production capacity, raising serious concerns among market participants and its repercussions over inflation figures which have reached double digits recently. Petrobras said that it is maximizing its production and delivery capacity, while the ANP has said it is monitoring the supply chain.


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