Daily Market Pulse

Dollar losses steam amid market neutrality


The U.S. dollar seems to have run out of steam after recording impressive gains during yesterday's trading session amid a dampened market mood sponsored by renewed Covid Jitters in China. Today the dollar index trades within a tight range and has retraced 0.19% since the start of the session after capitalizing 0.80% by Monday's close.  The U.S. treasury yields remain steady at 3.8% while stock market futures sustain levels suggesting a neutral market mood as participants await for further drivers to define the market course. Later on the day, the U.S. economic docket is set to post Richmond Fed Manufacturing Index to gauge economic activity.


The common currency regained some ground during the early hours of the trading session, advancing 0.40% against the greenback after yesterday’s pressure. However, comments from policymakers keep investors cautious as ECB officials seem to defer on approach. Mario Centeno mentioned Monday afternoon that many conditions need to be met for the next hike to be less than 75 bps, while Robert Holzmann from the ECB Governing council noted that he would support a 75 bps if the situation remains the same. Moreover, Europe's collateral shortage eased in recent days as policymakers have taken action. The asset swap spread, the premium paid by investors for German two-year bonds over equivalent swaps has dropped to its lowest levels since July, falling over 40 bps from a record high in September. This comes after the German Finance agency and the ECB took steps to increase the supply of debt available to borrow in repo markets.


The British Pound remains steady against the U.S. dollar on Tuesday morning amid a broader neutral risk sentiment in global markets, although the Sterling remains underperforming against most of its peers. The U.K. data showed in the early hours of the session that the government borrowing grew less than forecast in October, ahead of testimony in the House of Commons by officials from the Office for Budget Responsibility. Economists believe that the Sterling could stabilize in 2023, although that will be dependent on boosting controls of inflation, cutting public debt, and developing long-term trade relationships. This year the pound was strongly hit by uncertainty around government spending, interest rate differentials in favor of the dollar, risk flows, and deterioration of the post-Brexit U.K. current account.


The Japanese Yen capitalizes 0.68% on Tuesday morning against the dollar after a tough start of the week driven by risk-off flows. The Yen raises for the first time in five days after comments from Fed officials solidified bets for smaller rate hikes. Japan’s yield curve steepens amid the local Labor Thanksgiving holiday. Economists believe that the Yen has significant downside risk mainly driven by China’s Covid worsening situation and higher U.S. yields which are at least expected to increase by 50 bps in December.


Once more, the Canadian Dollar retreated (-0.55%) against the USD on Monday, as oil prices slid, amid renewed worries about China's Covid-zero policy. According to local media, China reported its first Covid-related death in almost six months on Saturday and two were reported on Sunday, raising concerns about further restrictions in the world’s biggest oil importer. Earlier this morning, the CAD printed small gains with traders waiting for fresh Canadian Retail Sales data for September, which is expected -0.7% MoM versus 0.7% prior, though.


After a long weekend in the country, with most of the traders out of their desks and low liquidity in the markets, the Mexico peso weakened 0.52% against the greenback on Monday. As a result, the currency registered its third day of losses in a row. Recent CTFC data showed that investors and traders are building a net long MXN position, with derivatives jumping to 67,851 contracts in the week ending November 15, the highest since March 2020. On the policy front, the interest rate curve is pricing almost 100bps of hikes before the current tightening cycle finishes in 1Q at around 11%. In the day ahead, market players will await fresh September retail sales figures.


The yuan closed 0.64% down against the USD on Monday, amid new signs that officials are reverting to tighter Covid-zero curbs as cases multiply. According to local media, a city near Beijing that was rumored to be a test case for China dispensing with all virus restrictions has suspended schools, locked down universities, and asked residents to stay at home for five days. On the other hand, 10-year government bond yields gained 1bp to 2.83% as investors assessed the potential outlook of the economic recovery, causing oscillations in the (Net Asset Value) NAV of some assets held by investment managers.


The Brazilian Real printed strong gains (+1.38%) against the greenback after elected president Lula delivered soft comments around its fiscal stance. Lula mentioned that his government is fully aware of the fiscal responsibility, however, it is unclear how much extra spending will pass in congress. Also yesterday, financial market analysis increased the inflation forecast for this year from 5.82% to 5.88%. It was the fourth increase in a row in the indicator. In addition, the financial market increased the forecast for an increase in the Gross Domestic Product (GDP) in 2022 from 2.77% to 2.80%. As for 2023, the growth forecast was stable at 0.70%. Looking ahead, given that no economic data will be released, investors will continue to monitor political developments in the country.


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