Daily Market Pulse

Dollar regains as risk aversion takes over


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.03% lower in the previous session before regaining its momentum this morning as the risk aversion takes over. On Tuesday, the dollar index rose, reflecting rising safe-haven demand for the currency as investors sought to hedge geopolitical and inflationary risks. Meanwhile, Russian President Vladimir Putin acknowledged the independence of two breakaway regions in eastern Ukraine and deployed troops to the region. U.S. President Joe Biden replied by imposing sanctions on the two breakaway regions, with the European Union promising more action. Additionally, Crude oil rose to a new seven-year high on fears that a major conflict will interrupt supply, adding to worries about additional inflationary pressures. Elsewhere, Federal Reserve Governor Michelle Bowman stated on Monday that a 50 basis point rate hike at the March meeting may occur if PCE inflation, which is due later this week, exceeds forecasts. Moving forward, Consumer Confidence Index and Markit PMIs will be featured in the U.S. economic docket.


The Euro closed 0.22% lower yesterday before rebounding on Tuesday morning. The Euro nudged higher in the final week of February as traders continued to monitor the Ukrainian issue and hoped for a diplomatic solution to end the war and avert an invasion of Ukraine. Meanwhile, the IHS Markit Eurozone Composite PMI rose to 55.8 in February 2022 from 52.3 in January, exceeding expectations of 52.7. According to preliminary estimates, the figure indicated the biggest rise in private sector activity in five months, as COVID-19 containment restrictions were loosened. Growth was especially strong in the service sector (55.8 vs 51.1), which includes consumer-facing activities as well as travel and tourism. In other news, investors are looking for more signs about the European Central Bank's monetary policy as price pressures in the Eurozone continue to rise.


The Pound Sterling closed 0.10% higher although it lost its pace and nudged lower this morning ahead of the Bank of England Deputy Governor’s speech. An increase in hostilities between Russia and Ukraine spurred a new wave of global risk-aversion trading. This resulted in safe-haven flows to the U.S. dollar, which proved to be a crucial factor in the Sterling's decline. Meanwhile, recent geopolitical developments have caused investors to revise their expectations for the Fed to respond more aggressively to persistently rising inflation. This, together with increased bets on additional rate hikes by the Bank of England, helped limit Sterling's downside. In other news, the IHS Markit/CIPS UK Composite PMI increased to 60.2 in February 2022 from 54.2 in January, exceeding market expectations of 55. The data indicated the fastest expansion in private sector activity in eight months, following interruptions caused by the Omicron variation at the beginning of the year. This was led by a significant recovery in consumer expenditure on travel, leisure, and entertainment. Moving forward, traders will be looking out for BoE Deputy Governor Ramsden’s speech this morning to drive Sterling prices further. 


The Japanese Yen closed 0.16% higher in the previous session and continues to post modest gains this morning. On Tuesday, the Yen hit a near three-week high as safe-haven demand for the currency grew after Russia deployed soldiers into separatist areas of eastern Ukraine, raising the prospect of a major conflict. Meanwhile, Japan's core inflation rate fell to 0.2% in January, missing expectations and maintaining considerably below the central bank's target. Toyoaki Nakamura, a member of the Bank of Japan's board of directors, has stated that the BOJ will retain its ultra-loose monetary policy in order to help the economic recovery and attain the 2%inflation objective. His remarks echoed those of other policymakers, emphasizing one of the more dovish attitudes among major central banks. Elsewhere, the Nikkei 225 Index sank 1.71%, while the wider Topix Index fell 1.55% as investors remained on edge after Russian President Vladimir Putin acknowledged the independence of two breakaway regions in eastern Ukraine and then sent the military into the area.


The Loonie closed 0.03% lower in the previous session against the greenback.  The Loonie fell slightly in early morning trading on Tuesday, amid a slight increase in demand for the U.S. dollar, which was boosted by the global flight to safety. Recent geopolitical developments sparked a new round of risk-aversion trading, forcing investors to seek sanctuary in conventional safe-haven assets. On the other hand, a significant drop in U.S. Treasury bond yields and rising crude oil prices held Loonie's losses to a minimum. Market players are now anticipating the U.S. data calendar, particularly the release of flash PMI numbers later in the early North American session. The attention, on the other hand, will remain on developments in Ukraine. Aside from that, the crude oil prices dynamics should provide some push to the Loonie.


The Mexican Peso closed 0.04% higher yesterday before losing its momentum on Tuesday morning. Since late January, the Mexican Peso has been climbing against the U.S. dollar, reaching its best level since October 2020, buoyed by rising interest rates, while investors around the world continue to monitor events in Eastern Europe. On concerns about inflationary pressures, Mexico's central bank raised interest rates for the sixth time in a row in February, raising borrowing prices to 6%, the most since April 2020. The monetary authority stated that inflation risks remain skewed to the upside, with inflation expectations for 2022 and 2023 rising again, while medium-term expectations fell marginally and long-term expectations remained unchanged at levels above the target.


The Chinese Yuan closed 0.12% lower in the previous session against the greenback. The Yuan fell against the U.S. dollar on Tuesday, retreating from a four-year high reached late last week as risk currencies fell under the pressure of Russia deploying soldiers into separatist areas in eastern Ukraine, raising the prospect of a major confrontation. To add to the negative mood, the People's Bank of China recently increased liquidity in the financial sector and lowered various policy loan rates. Last week's data also revealed that consumer and producer prices in China declined more than predicted, providing the PBOC more leeway to soften monetary policies further to assist economic growth. Elsewhere, the Shanghai Composite slid 0.96% and the Shenzhen Component fell 1.29% as global investors fled risk assets after Russian President Vladimir Putin recognized the independence of two breakaway regions in eastern Ukraine and then sent the military into the area.


The Brazilian Real closed 0.53% higher in the last session against the greenback. Surprisingly, the Real continues to appreciate against the U.S. dollar, apparently unshaken by the geopolitical crisis and strongly supported by the inflow of foreign capital. In doing so, the currency renewed the maximum in almost seven months and maintains the title of the currency with the best performance in the world this year. Meanwhile, FGV will release its consumer confidence index for February and the Ministry of Labor will publish the creation of new vacancies in the job market in January. However, macro updates will be overshadowed by Putin's warlike maneuvers. Elsewhere, the main Sao Paulo market index, the Bovespa, lost 1% on Monday, extending losses for the third session and tracking global shares amid mounting fears of a Russian invasion of Ukraine after President Putin recognized the independence of separatist districts in eastern Ukraine.


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