Daily Market Pulse

Dollar steady ahead of FOMC


The U.S. dollar index, a benchmark used to assess the valuation of the greenback compared to a basket of six major currencies, diluted its risk-off momentum as Evergrande jitters find some calm ahead of the critical Federal Open Market Committee. The index attempted to retrace 0.2% during yesterday's trading session, although it failed to consolidate, closing relatively unchanged (0.03%) amid market cautious optimism. Evergrande announced that the real estate conglomerate would pay its Yuan-denominated debt payments on Thursday, which eased bullish pressure over the dollar during yesterday's trading session, while the People’s Bank of China injected more liquidity into markets. Investors now turn their attention to the U.S. Fed, which is set to signal timing for tapering its bond purchasing programme later on today. However, there is debate amongst economists to agree whether Evergrande’s default accounts to a “Lehman Moment”, or if it's a manageable event. Optimists seem to have the upper hand, despite the lack of details provided by the Real Estate giant. However, it is unclear what will happen to the dollar-denominated debt and the risks of contagion to other firms and economies. However, as the Chinese drama unfolds, investors seem optimistic ahead of the FOMC, with equity indexes edging higher amid cautious risk-on while the safe-haven dollar remains soft. Jerome Powell, chairman of the Fed, is due to hold a press conference to provide its tapering assessment or at least hint at it. Recent softer inflation and disappointing job reports might keep Powell from sharing a message of imminent tightening. Nonetheless, U.S. democrats passed a bill on Tuesday with the intention to fund the government through December 3rd, and they also uncapped the country’s borrowing limit until the end of 2022.    


The EUR insisted on igniting a bounce back against the dollar, failing to find demand due to the lack of optimism mainly emanating from China. The European Central Bank Vice President Luis de Guindos, and policymaker Yannis Stournaras, highlighted upside risks to the inflation outlooks, indirectly challenging easy-money in the block and favouring EUR bulls. Moreover, Chancellor Angela Merkel has joined Armin Laschet, her embattled successor, in an effort to boost his campaign. However, Olaf Scholz, the center-left candidate, remains in the lead of the polls ahead of the upcoming key vote set to take place on the 26th of September. Coming up, Consumer confidence readings later today will be a useful gauge to assess morale in the Eurozone. 


The Pound Sterling remains under pressure against the dollar, profiling to extend losses during today's trading session amid a firm dollar and the upcoming Fed’s interest rate decision. The Pound’s potential remains capped amid supply chain bottlenecks and higher gas prices. The Pound remained the worst-performing major currency for the past few sessions and is expected to accentuate its pressure as the U.K energy crisis and global stock market sell-off continues. Additionally, no relevant outcome came from the face-to-face meeting between President Joe Biden and Prime Minister Boris Johnson, as there was no clear progress on any post-Brexit trade agreement with the U.S., while investors now turn their attention to the upcoming FOMC.    


The Japanese Yen reverts its bullish momentum, as Everrgande jitters ease down following the announcement of the payment of their debt denominated in Yuan, and the People's Bank of China injecting over CNY 110 billion of liquidity into the financial systems to ease financial conditions. The greenback gains momentum ahead of the expected FOMC, from where Jerome Powell is expected to leave monetary policy unchanged and to hint when policymakers are expecting to start withdrawing stimulus. Today, the Bank of Japan announced its unanimous decision to leave its interest rate unchanged at -0.10%, and to target the 10-year Japanese government bond yield at around 0%. Policymakers pledged to continue supporting the economy with its asset purchase facility, although the spokesman reduced their assessment in growth and exports, citing the ongoing labour shortage and shipping crisis. 


The Loonie remained steady against the dollar during the last trading session amid market uncertainty and low-risk sentiment due to the Evergrande default and the upcoming Fed’s interest rate decision which keeps investors cautious. The West Texas intermediate sustains levels at USD 71 per barrel ahead of the expected weekly U.S. inventory reports, which last week announced a shortage amid the impact of hurricane Nicholas in the Gulf of Mexico affecting output. This week, inventories will be hand in hand with China's expectations of crisis contagion to other firms and sectors, which keeps market participants nervous. 


The Mexican Peso renewed momentum during the early trading hours of today, advancing 0.24% against the dollar ahead of interest rate decision from U.S. policymakers. The Mexican government announced the placement of a new five-year bond of MXN 12.5 billion (USD 622 million) with a fixed interest rate. According to the Finance minister, the bond will expire in 2027 and offers a coupon rate of 5.5% and a yield of 6.93%. In total, the demand for national and foreign investors totaled over MXN 15.19 billion, more than 1.22 times the initial subscription amount.   


The Chinese Renminbi fell back 0.18% during yesterday's trading session amid the Evergrande financial fallout and stimuli injection from policymakers, which started to nurture the market sentiment. The People’s Bank of China injected around CNY 110 billion into the financial market in order to relieve market conditions amid the fallout of Evergrande, which announced that the firm will pay its CNY-denominated debt on Thursday. However, China's other real estate player Guangzhou R&F suspends bond trading amid challenging liquidity conditions, portraying fears of contagion. The Chief Economist from the International Monetary Fund shared its optimism over China’s ability and the People’s Bank of China's fast reaction to tame the fears emanating from Evergrande’s default. 


The Brazilian Real edged 0.70% higher against the dollar during yesterday's trading session amid easing concern over China to help restore market sentiment and the Brazilian Central Bank meeting later today. Following the recent inflationary pressures, where CPI reached the highest in over 20 years, market participants expect policymakers to announce a 100 bps interest rate hike to tame the out-of-control inflation. Moreover, the cautious optimism in the market mood is taking into consideration that investors seem to have confidence that the Chinese government will take steps to prevent the property giant’s crisis from destabilizing the financial system and the economy.   


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