Daily Market Pulse

Strong dollar outperforms most of its peers amid risk-off

6 minute read


The U.S. dollar index, a coefficient used to benchmark the performance of the greenback against a basket of six major currencies, rallied against most of its peers, except for safe-haven currencies like the JPY and CHF. Without any particular catalyst behind the dismal sentiment, sustained inflation and echoes of Evergrande keep uncertainty as the main driver of financial markets. Additionally, the U.S. treasury yields reached fresh multi-month highs at 1.68% while stocks smashed new all-time highs amid earning reports. The S&P  index surpassed a previous peak during yesterday’s trading session, rallying 0.3% after blue-chip companies exceeded earnings expectations, triggering a broader rally. The technology-focused Nasdaq composite advanced 0.6% while European Stoxx 600 index continues to flirt with its August high amid equity markets momentum. Moreover, the U.S. Federal Reserve banned stocks trading and restring other investing activities by top officials. The movement came after Chair Powell sold up to USD 5 million worth of stocks from his account in early October. Mixed data in the U.S. kept market participants uncertain as weekly jobless claims released on Thursday outperformed expectations, posting 290k vs 300k expected, while Philadelphia Fed manufacturing surveys failed to impress with a shy 23.8 vs 25 previously anticipated. Today, market participants remain tuned to Markit PMIs which should provide a useful insight into the economic activity of the country.  


The EUR retraced 0.22% against the dollar during yesterday’s trading session, snapping 6 straight days of recording gains. Supply chain disruptions and surging energy prices are hitting growth and raising inflation in the European market. This is a complex cocktail for policymakers to manage, and the upcoming Markit manufacturing PMIs for Europe and Germany will be crucial for the European Central Bank (ECB) to steer monetary policy. Despite the firm performance of the Eurozone in the second and third quarters, ECB officials fear that growth has peaked at this stage amid the current economic environment. 


The Pound Sterling lost momentum against the dollar after a solid week that was sponsored by interest rate hike expectations from U.K policymakers. However, the latest inflation figures came out short, increasing the odds that the tightening cycle might be postponed, pausing the latest rally. Additionally, U.K. secretary Sajid Javid warned that Covid-19 cases could hit 100k a day, revising concerns about the nation’s economic recovery. Nonetheless, morale indicators showed that British market participants remain cautious as the GfK consumer confidence posted -17 vs -16 expected. Today, retail sales in the U.K also added to the dismal mood, as annualized reading contracted more than previously anticipated, reporting -1.3% while consensus was set at -0.4%. Coming up, Markit Manufacturing PMI will provide useful insight for participants to interpret economic activity. 


The Japanese Yen benefitted from the dismal mood amid its safe-haven appeal among market participants. The Japanese currencies recovered 0.16% against the dollar on Thursday, and the pair trades horizontally ahead of key PMI figures. The U.S. Treasury yields continue to edge higher, reaching 1.68% and limiting losses for the greenback. However, the risk sentiment was dented following the renewed China’s Evergrande default risk as the company’s acquisition for USD 2.6 billion fell apart due to both parties failing to reach an agreement. Moreover, encouraging inflation reading from Japan also aided the currency to gain some traction during Thursday’s trading session, as the National Price Index expanded 0.2% annualized, while market participants expected a 0.8% contraction. Nonetheless, Jibun Bank Manufacturing PMI released early today exceeded expectations at 53 vs 51.4 expected. 


The Loonie snapped a two-day trend as the greenback attempted a bounceback amid a broader risk-off sentiment extending into Europe and renewed Evergrande fears. Moreover, the West Texas Intermediate (WTI) retreated from its seven-year tops, undermining the Canadian dollar amid fears of a more accentuated economic slowdown in China. Despite the recent rebound, risks remain skewed to the upside for the Loonie, as firmer Canadian inflation data fans sooner than expected rate hikes from Canadian policymakers. The Consumer Price Index readings revealed that headline inflation rose by 4.4% in September, above 4.3% previously anticipated and well above the Bank of Canada’s target.  


The Mexican Peso remained subdued amid a broader risk-off mood underpinning the greenback alongside higher U.S. treasury yields. Moreover, a dramatic fiscal miscellany bill, which intends to impose tax collection rules, was finally approved in Mexico’s lower chamber of congress. This comes after 72 hours of debate, over 500 amendments, and an outbreak of insults, fighting and pushing among deputies and members of the house. Additionally, Mexico's foreign minister and economy minister announced that the government is targeting a USD 25 billion investment from the U.S. between 2022 and 2024 to spur the economic development of the southern states of Mexico.   


The Chinese Yuan continues to trade sideways after the strong rally recorded during Tuesday’s trading session. The Chinese government is planning to hold a virtual meeting between President Joe Biden and Xi Jinping, which sets positive expectations as the relationship between both superpowers grows. Moreover, the People’s Bank of China needs to support a slowing economy while keeping inflation in check, and market participants expect a certain level of easing of monetary policy, although they will likely seek targeted measures. However, PBoC officials will need to strike a delicate balance, as policymakers keep a firm eye on inflation and the rising costs of the U.S. dollar-denominated debt, as the Fed kicks off the tightening cycle of its monetary policy approach. Moreover, the fallout of the Evergrande acquisition keeps market participants cautious as fears of a shockwave in the global market keep sentiment in check, although the real estate giant managed to avoid an official default as it managed to comply with its interest payment before the deadline set for this weekend. 


The Brazilian Real subdued against the dollar, reaching April’s levels amid a broader risk-off mood and bolstering U.S. Treasury yields adding pressure to emerging market currencies. The Real fell over 1% during yesterday’s trading session, becoming one of the worst-performing currencies against the greenback amid fears that the government could break the spending cap. Paulo Guedes, Brazil's economy minister, said that the government may exceed the constitutionally mandated spending cap to fund a new social programme, which raised concerns over the fiscal responsibility of Bolsonaro’s government.  


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