Daily Market Pulse

Dollar edges higher upon hawkish views


Following Thursday's volatility and Japan's intervention in the foreign exchange market, the Swiss National Bank (SNB), and the Bank of England (BoE) rate hikes, markets appear to have calmed down early Friday. The U.S. dollar index remained solid on Friday, staying near a 20-year high, supported by predictions that the Federal Reserve will remain active in combating inflation even if a recession is imminent. The dollar also benefited from safe-haven flows as geopolitical tensions in Ukraine escalated and fears of a global economic slowdown grew. Meanwhile, the dollar fell against the Yen yesterday as the Japanese government interfered in currency markets for the first time since 1998.


The Euro failed to recoup its strength and closed 0.01% lower on Thursday. The common currency continued its modest downswing on Friday morning amid the renewed dollar strength. Early today, stats show that the Eurozone consumer confidence indicator decreased by 3.8 points to -28.8 in September 2022, falling short of market estimates of -25.8. It is the lowest reading since the series began in 1985, as consumers are concerned about the economy after Russia froze energy shipments through Nord Stream 1 indefinitely and the ECB tightened monetary policy. Consumer sentiment in the European Union as a whole fell 3.5 points to -29.9.


The British Pound gained some traction yesterday but closed in the red (0.08% lower) following the Bank of England's monetary policy announcement. The Bank of England hiked its policy rate by 50 basis points to 2.25% on Thursday, as predicted. The early market reaction caused the British pound to lose interest since futures markets were pricing in a 75 basis point increase. The Pound edged lower today morning as the market remained calm, as well as the S&P global service PMI, which came short of expectations, 49.2 against 50. In other news, Liz Truss' government announced the largest tax cuts since 1972, lowering levies on worker wages and businesses in an effort to increase the economy's long-term potential.


The Japanese Yen remained steady after it surged over 1% yesterday following the intervention by the government to stem the rapid Yen’s decline. The government intervened in currency markets for the first time since 1998 following the Bank of Japan’s ultra-low interest rate policy decision. The Yen's weakening has been driven mostly by Japan and the United States' growing policy divergence. While the Bank of Japan has maintained ultra-easy policies to promote a shaky economic recovery, the Federal Reserve of the United States has been rapidly raising interest rates to manage runaway inflation.


After falling 0.18% yesterday, the Canadian currency continued to drop against the U.S. dollar on Friday as investors continued to assess the outlook for the global economy and inflation following the Federal Reserve's interest rate hike. Meanwhile, domestically, the central bank boosted its policy target by 75 basis points for the third time in a row, and the carefully followed dot plot chart indicated that borrowing prices could reach 4.6% by March. In other news, new home prices in Canada increased 0.1% for the second month in a row in August 2022.


The Mexican Peso rose (0.37%) for the first time in three days on Thursday, tracking currency gains across Latin America and being unaffected by rises in U.S. Treasury yields. The Peso has been one of the best-performing EM currencies this week and month. According to the most recent data, consumer prices grew 8.76% year on year in the first two weeks of September, exceeding the 8.71% median prediction in a Bloomberg survey; core prices rose slightly more than consensus. Going forward, three meetings of the Bank of Mexico are slated for September, November, and December. The market's prices equal odds of a 75bp to 100bp rate hike this month and completely prices a 50bp increase in November.


On Friday, China's Yuan completed the domestic trading day at a near 28-month low and appeared headed for its greatest weekly loss in five months, as a widening yield disparity between the world's two largest economies weighed on the Chinese currency. The yield differential between the benchmark 10-year U.S. Treasury bond and its Chinese counterpart was at its biggest since 2007. For the 22nd trading day in a row, the central bank put the official guiding rate higher than market expectations, a move that the market viewed as an attempt to arrest the Yuan's drop. According to several market players, the central bank's firmer-than-expected midpoint fixings have limited downside risk, at least for the time being.


The dollar fell on Thursday following the super Wednesday that determined interest rates in Brazil and the United States. The Federal Reserve (Fed), the U.S. central bank, raised interest rates to a range of 3% to 3.25%, a 0.75 percentage point increase. Interest rates are at an all-time high for the seventh time this year. High-interest rates in the United States tend to be reflected in a rise in the Brazilian dollar rate, as the currency departs the country in search of better recompense elsewhere. In Brazil, the Central Bank decided to keep interest rates at 13.75%, but it sent a clear message that if inflationary pressures returned, the Selic could rise again.


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