Daily Market Pulse

FOMC suggest tapering will be warranted


The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, advanced 0.25% immediately after the Federal Reserve announced its monetary policy decision during yesterday's trading session. Policymakers decided to leave monetary policy unchanged and hinted at immediate tapering as soon as November if data continues to show broad progress as expected. The Federal Open Market Committee considers that a slowdown in the pace of asset purchases may soon be warranted, although resilience in incoming data should be sustained. Additionally, the Fed will continue to monitor the implications of incoming information for the economic outlook, suggesting that the committee is prepared to adjust its stance if risks emerge that could derail the economy from achieving the Committee’s goals. The “hawkish” stance from Fed policymakers added to the demand for dollars, bolstered by climbing yields as the market prepares expectations towards rate hikes in 2022 and 2023. However, as the impact of FOMC dilutes during the overnight session, the risk tone appears to be calmer during the early hours of today’s trading session. While investors digest the tapering announcement from policymakers, the market remains cautious amid the Evergrande debt crisis impending USD 83 million debt repayments this Thursday which pushed the People’s Bank of China to inject an additional USD 17 billion into the system. Market participants keep hopes that the property giant will progress on solutions as the company still has a 30-day grace period before it is registered as a default. Coming up, Jobless Claims reports and Markit PMIs are due later today with the potential to ignite renewed impetus over the market sentiment.   


The EUR remained subdued against the greenback during yesterday's trading session amid U.S. policymakers announcing tapering. However, the risk appetite seems to have improved over global markets as the dollar pulled back during the early hours of the European trading session, with the EUR bouncing back 0.31% from August lows, erasing losses from the FOMC announcement. The risk-on sentiment comes off the back of Policymakers in China pumping money into the financial system amid the Evergrande debt crisis, which encourages optimism amongst investors. Additionally, progress from U.S. policymakers on their much-awaited stimulus and the U.S. Food and Drug Administration (FDA) approval for booster shops of Covid vaccine for the aged above 65 favor the risk-on mood, weighing on the greenback. Additionally, Comments from Madis Muller, Governing Council member from the European Central Bank (ECB) snapped the series of hawkish comments from previous policymakers capping the demand for EUR. The positive market sentiment seems to prevail despite the disappointing Markit PMI figures which failed to meet expectations during the early hours of the European session.     


The Pound Sterling retraced strongly following comments from Fed officials hinting at tapering and bringing forward interest rate hike expectations between 2022 and 2023. However, as the market diggest FOMC the market sentiment shows resilience amid PBoC stimulus support over the Evergrande fallout and Covid-19 booster shots approval by the FDA. However, the U.K. is facing acute supply constraints, shop shortages, and price triggering potential corporate failures and household hardships have become a political issue that has obliged the government to step in to sort other supply chain issues. Today, the Bank of England will take the stage and will have to balance supply chain constraints, surging prices, and recovery risks amid fiscal pressures arising.  


The Japanese Yen remained subdued against the dollar amid Fed officials suggesting imminent tapering and risk-on sentiment weighing on the safe-haven appeal of Japan’s currency. The tapering announcement came along with interest rate hike expectations brought forward between 2022 and 2023 which pushed Treasury Yields adding to the broader demand for dollars. The improved risk sentiment is supported by the PBoC which injected an additional USD 17 billion dollars into the system to prevent a blowout in the economy. The sustained support from policymakers keeps investors with hopes that Evergrande’s crisis will be constrained while covid woes ease amid booster shots announcements. Additionally, the JPY has remained subdued amid dovish BoJ pledging to continue supporting the economy with its asset purchase facility, although the spokesman reduced their assessment in growth and exports, citing the ongoing labor shortage and shipping crisis.


The Loonie edges higher against the dollar, recording 0.79% gains amid an improved risk sentiment during the early hours of today’s session. Sustained stimulus from the PBoC amid the Evergrande debt crisis keeps markets optimistic. Moreover, the West Texas Intermediate remained well supported by the release of inventories during yesterday’s trading session which showed that U.S. crude stocks fell 414 million barrels, the lowest since October 2018. Later today, Canadian retail sales are expected at 4.4% month, higher than its previous release at 4.2%.   


The Mexican Peso edges 0.30% higher against the greenback amid a broader risk-on sentiment sponsored by the hawkish federal reserve and the PBoC injecting liquidity amid the Evergrande debt crisis. The MXN sustains momentum amid CPI data expected to report an increase in today's Bi-weekly report. Market participants expect inflation to pick up from 0.18% to 0.28% ahead of tomorrow's Retail Sales. If inflation sustains, Banxico is expected to adjust rates in September by 25 bps according to the latest survey from Citibanamex. 


The Chinese Yuan advances for two consecutive days amid an improvement in risk sentiment after the Peoples Bank of China announced the latest injection of liquidity of USD 17 billion to sustain the economy from the Evergrande debt crisis. Market participants believe that a cut in Reserve Requirement Ratio from the PBoC is now more necessary than ever, and could be larger than 50 bps, to contain the Evergrande risks. Additionally, the PBoC is likely to step in to support the Renminbi in any credit event that causes the currency to depreciate as we have witnessed in the latest liquidity injections which have helped ease financial conditions with the lowest overnight borrowing cost in over three weeks. Moreover, the Chinese government advised Evergrande not to default on its USD denominated debt which keeps investors holding on to hopes that the default won't be declared in the next 30 day grace period.   


The Brazilian Real advances against the dollar following the monetary policy meetings from both the Brazil Central Bank and the Federal Reserve. Despite Fed official announcement tapering and bringing forward interest rate hike expectations, the BRL remained on the front after the BCB raised its benchmark Selic rate by 100 bps, as expected, and indicated a similar hike in the upcoming October meeting. The rate hike in addition to a broader risk-on sentiment amid China woes easing, keep supporting risky assets adding to the demand for Reales. 


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