Daily Market Pulse

Dollar buying continues


The U.S. dollar rally continues on Tuesday, with the dollar index rising to its highest level since September 2002. Its momentum is fueled by safe-haven flows and hopes that the Federal Reserve will press ahead with its aggressive tightening strategy to bring inflation much lower. Last week, numerous U.S. policymakers made hawkish views on the need for further tightening, driving the dollar even higher against most of its peers. Markets are currently leaning on another 75 basis point rate increase in September. Traders also anticipate Fed Chair Jerome Powell's address at the annual Jackson Hole conference later this week, indicating how high U.S. borrowing costs may go. In early European morning, U.S. market index futures were down between 0.3% and 0.5%, reflecting the cautious sentiment.


The Euro plunged 0.96% and closed below parity for the first time since late 2002. The common currency extended its slide early Tuesday as European recession fears resurfaced amid a worsening energy crisis. Natural gas prices are approaching €300 per megawatt-hour after Russian state-owned energy exporter Gazprom said that the Nord Stream natural-gas pipeline to Germany would be shut down for three days for maintenance at the end of August. Furthermore, flash August Global S&P PMIs revealed that business activity in the Eurozone declined for the second consecutive month, albeit at a slower-than-expected rate. Investors are now waiting for the European Central Bank's monetary policy meeting accounts on Thursday, which is expected to be hawkish.


After losing 0.78% yesterday, the British Pound has been trading at its lowest level since March 2020 this morning. The concerns of runaway inflation threaten to erode the purchasing power of the pound and further harm the British economy. Meanwhile, Citi economists predict that inflation will reach 18.6% by the beginning of 2023 due to rising wholesale gas costs, bolstered by estimates that the country's retail energy price ceiling will reach £ 5,816 by April from £ 1,971 today. Going ahead, financial markets expect the Bank of England to raise its primary interest rate by 50 basis points to 2.25% at its September meeting, marking the seventh straight rate hike and pushing borrowing prices to their highest level since 2008.


The Japanese Yen fell more than 50 pips on Monday before bouncing back on Tuesday as traders consolidate profits amid the recent dollar run. Meanwhile, the newest figures show that Manufacturing activity has fallen to a 19-month low, with the Manufacturing PMI falling from 52.1 in July to 51 in August, compared to an analyst projection of 51.9. Output fell for the second month in a row, marking the steepest drop in 11 months. At the same time, due to persistent supply bottlenecks, the employment growth rate has broadly stagnated, and both input and output cost inflation has slowed. Finally, business confidence fell to a three-month low.


The Canadian dollar closed 0.48% lower yesterday amid a market risk-off tone. Still, it regained traction this morning when crude oil gained ground following statements from OPEC+ and Saudi Arabia. The WTI futures are nearing US$ 91 per barrel, while Brent is approaching US$ 97, underpinning commodity-linked currencies. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman reiterated that oil production could be curtailed if necessary owing to market volatility and liquidity issues. The idea of delivering natural gas to Europe boosted the Loonie. All eyes are focused on the Jackson Hole symposium that begins on Thursday.


The Mexican Peso paused its sell-off and gained ground yesterday, closing 0.21% higher. It is sustaining its gains on Tuesday morning amid improved crude oil prices and a hawkish tone by Banxico. The West Texas Intermediate crude futures surged toward $91 per barrel as Saudi Arabia warned that OPEC+ might reduce supply to offset significant drops in oil prices. However, the Peso still tracks other emerging market currencies as concerns about the global economic slowdown dampened demand for risky currencies and drove investors to safer assets. In other news, Deputy Governor Jonathan Heath of the Bank of Mexico stated that the central bank is expected to follow the Federal Reserve at its next meeting in late September, as both countries grapple with high inflation and recession fears.


The Chinese Yuan fell to a two-year low versus the greenback on Tuesday, as Beijing's efforts to ease policies to revive the flagging economy and the Federal Reserve's unrelenting tightening weighed on the Chinese currency. China slashed benchmark lending rates again on Monday, reflecting the pressures on growth from Covid lockdowns, a property crisis, and a deteriorating global economy. Despite headlines about the Chinese government's efforts to stabilize the economy, there was no relief in the Chinese market. Given the bleak outlook for China's economy and the strength of the U.S. dollar, economists expect the Yuan to fall further in the near term.


Although the Brazilian currency came to lose its breath at the beginning of this Monday's session, the recovery in ore futures prices set a positive tone for the Real. At the end of the day, the Real closed up 0.6%. Another tailwind for the Brazilian currency is the interest rate cuts by Chinese banks to infuse more cash into the struggling property market. As a result, Agricultural commodities and minerals went up. Meanwhile, the forecast for inflation for this year dropped from 7.02% to 6.82%, according to the "Focus" report released this Monday by the Central Bank. This was the eighth consecutive drop, and It's the first time since April 5 that the market's inflation expectation was below the 7% mark.


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