Daily Market Pulse

Dollar regains ground on safe-haven flows


On Thursday, markets remained risk-averse as investors grew increasingly concerned about a global recession. After falling 0.23% yesterday, the U.S. dollar regained slightly as safe-haven demand increases this morning. Powell admitted to the Senate Banking Committee on Wednesday that the Fed's rate hikes could trigger a recession. When asked if the Fed would consider raising interest rates by 100 basis points in the near future, Powell stated that any size rate increase would be considered. U.S. stock index futures nudged down in the European morning, highlighting the market's cautious mood. Moving forward, the S&P Global Manufacturing and Services PMIs will be included in the U.S. economic calendar.


Following a gain in the previous session of 0.31%, the common currency failed to maintain its momentum and fell on Thursday morning. The Eurozone’s disappointing PMI data appear to be weighing heavily on the common currency. With that said, the S&P Global Eurozone Composite PMI fell to 54.8 in June 2022, from 51.9 in May, compared to the market consensus of 54. It was the lowest reading since February 2021, when new orders for goods and services stagnated for the first time since the demand recovery began in early 2021. Furthermore, the Eurozone consumer confidence indicator fell by 2.4 points to -23.6 in June 2022, from -21.1 in May, compared to market expectations of -20.5. The reading falls just short of the all-time low set in April 2020, when the Covid-19 made its first appearance in Europe. Inflationary pressures, combined with the effects of Russia's war in Ukraine, are putting a strain on purchasing power.


Yesterday's loss of 0.08% was followed by a downtrend early Thursday. The British pound is struggling to find demand as investors continue to shift away from risky assets. Meanwhile, public sector net borrowing in the UK was £14.0 billion in May 2022, the third-highest May borrowing since monthly records began in 1993 and £3.7 billion higher than the Office for Budget Responsibility forecast. In other news, by-elections in two former Conservative seats will reveal how popular Boris Johnson's government remains, and rail workers in the United Kingdom will strike for the second time this week, limiting train services to 20% of normal levels. The FTSE 100 fell more than 0.5% on Thursday, adding to a 0.9% drop in the previous session, dragged down by commodity-linked stocks amid rising recession risks.


The Japanese yen is continuing to rally today after finishing the volatile session with a 0.23% gain against the U.S. dollar. The Japanese yen is benefiting from recession fears and a risk-averse market mood. Domestically, the Jibun Bank Japan Manufacturing PMI fell to 52.7 in May 2022 from 53.3 in April, according to a flash reading. Despite being the lowest figure in four months and indicating the joint-softest operating conditions since last September, the latest print represented the 17th consecutive month of growth in factory activity following the lift of Covid curbs. On Thursday, the Nikkei 225 Index edged up 0.08%, while the broader Topix Index fell 0.05%, with Japanese shares failing to hold onto earlier-session gains after a lackluster session on Wall Street.


The Canadian dollar appears to be extending losses from its previous session where it retreated 0.19% against the U.S. dollar. Meanwhile, on the data front, annual inflation in Canada accelerated to 7.7% in May 2022, the highest since January 1983 and higher than market expectations of 7.4%. The main sources of upward pressure were transportation, food, and shelter, as Western sanctions imposed in response to Russian attacks on Ukraine continued to raise energy and commodity prices. Elsewhere, the S&P/TSX Composite index finished 1.32% lower on Wednesday, snapping a two-session winning streak, dragged down by a slump in commodity stocks and fears of recession after hotter-than-expected domestic inflation reinforced bets on the country's central bank raising interest rates even further. 


The Mexican peso rose 0.37% yesterday before edging lower on Thursday morning, following the lead of riskier assets. The sustained strength was built on investors as they await the Bank of Mexico's decision on another rate hike, which is expected later in the day. Meanwhile, Deputy Governor Jonathan Heath of the Bank of Mexico stated that the central bank is likely to raise its benchmark interest rate by 75 basis points, matching the Fed. Meanwhile, the country's central bank raised the key rate by 50 basis points in May for the eighth time in a row, raising borrowing costs to their highest level since February 2020.


The Chinese yuan finished marginally higher against the U.S. dollar on Wednesday. The yuan has remained under pressure as China's central bank is expected to resume policy easing at a time when other major economies are raising interest rates. President Xi Jinping stated that the country will "strengthen macro-policy adjustment and adopt more effective measures to strive to meet the social and economic development targets for 2022 and minimize the effects of Covid-19." On Thursday, the Shanghai Composite rose 1.62%, while the Shenzhen Component rose 2.19%, marking their highest closing levels in more than three months, as President Xi Jinping pledged to meet the year's economic targets.


The Brazilian currency eased yesterday and registered losses of 0.57% against the greenback. As a result, the Brazilian real hovered near a four-month low after the country's central bank hinted at more interest-rate hikes to bring inflation down to the official target next year while indicating that the Selic rate would remain significantly higher for a longer period to deal with high inflation levels. To make it worse, S&P Global named Brazil one of four other vulnerable emerging market countries whose credit ratings could be jeopardized as global interest rates rise, putting additional strain on already stretched budgets. Furthermore, the Brazilian central bank's director of international affairs recently stated that Brazil will experience more moderate growth in the coming quarters and that the central bank will need to take "aggressive" action in order for inflation to converge to the government's official target.


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