Daily Market Pulse

Dollar pauses its four-day rally


After a slew of dismal data, the U.S. dollar lost its steam and snapped a four-day winning streak yesterday to close 0.37% lower. However, the dollar is rising this morning despite choppy trading as investors remain wary before this week's Jackson Hole Symposium. Meanwhile, reports from the U.S. showed that private sector activity shrank even further in August. Also, a 12.6% drop in July for New Home Sales after a 7.1% drop in June. In other news, PMI readings have been gradually falling, supporting the idea that inflation may have peaked for the moment. However, the markets are still pricing in a 51.5% chance of a 75 basis points rate hike in September, according to the CME Group FedWatch Tool.


The Euro tried to recover yesterday (closed 0.27% higher) and revert to parity. Still, the rally fizzled out, and, as of early this morning, the currency is trading below the critical $1 mark. The weak dollar and economic data releases underpinned yesterday’s momentum. According to a preliminary estimate, consumer confidence in the Euro Area increased by 2.1 points in August 2022, from a record low of -27 in July. Total consumer sentiment in the European Union rose by 1 point to -26. Conversely, Services activity growth slowed more than expected in the Eurozone. Investors expect the ECB's monetary policy meeting accounts on Thursday to be hawkish.


On Tuesday, the British Pound rose more than 0.55% before entering a consolidation phase during Asian trading hours on Wednesday. The Pound sustains pressure as investors remain concerned that the economy is on the verge of a recession driven by an increase of costs and a decrease in business activity. Flash PMI data showed that the manufacturing sector unexpectedly dropped in August for the first time since May 2020. Services activity grew the slowest in a year and a half, but at a faster rate than forecast. The upcoming Jackson Hole meeting in Wyoming will be the next primary driver for the Pound. Andrew Bailey of the Bank of England and Jerome Powell of the Federal Reserve will have an opportunity to set expectations about their future objectives.


The Japanese Yen held steady versus the greenback after experiencing severe selling pressure throughout August. Investors weighed whether dismal U.S. economic data would limit the pace of Federal Reserve rate hikes. Traders are prepared for more volatility ahead of the Fed meeting in Jackson Hole in Wyoming, later this week. Elsewhere, the Bank of Japan has repeatedly stated that it will maintain ultra-low interest rates to support a fragile economy, making Japan's monetary policy significantly different from that of other developed countries.


The Canadian currency rose against the U.S. dollar yesterday, recovering from a four-week low but lost its momentum slightly this morning amid the cautious mood. The Loonie rebounce was underpinned by U.S. PMI data that revealed a second straight drop in the private sector, putting pressure on the greenback. On the policy front, the Federal Reserve and the Bank of Canada are expected to continue aggressively tightening monetary policy to contain surging inflation. While domestic headline inflation fell for the first time in almost a year, the central bank's average of the three core readings rose to 5.3% from 5.2% the previous month.


The Mexican Peso moves south on Wednesday morning following a 0.80% surge yesterday due to risk-averse market sentiment. In the previous session, the Peso rose for a second day as other emerging-market currencies rose, helped by a weak dollar after U.S. PMI readings and new house sales fell short of expectations. According to the most recent biweekly Citibanamex survey, the next Banxico rate move will be a 50 basis point increase in September. Furthermore, three Banxico meetings are slated for September, November, and December.


The Yuan fell against the dollar, reaching its lowest level in two years due to China's unstable economy and conflicting monetary policies. China's economy is still under strain because of the country's zero-Covid plan, property sector troubles, electricity shortages in manufacturing areas, and deteriorating external demand, which threatens the country's export-heavy businesses. As a result, China's central bank slashed key lending rates. Easing monetary policy starkly contrasts with other major hawkish central banks and heightens the possibility of faster capital outflows and more significant Yuan depreciation.


Disappointing U.S. PMI readings, as well as the positive performance of commodities, underpinned the recovery of the Brazilian currency last Tuesday, which closed 0.50% higher. In the political sphere, participants in the market continue to closely monitor the candidates' first interviews for the ¨Jornal Nacional¨ That’s positive as per the experts and is expected to weigh less in the Real exchange rate. Moving forward, the IPCA-15 is the primary data to be monitored today, with deflation expectations in the first fortnight of August. Consumer prices measured by the IPCA-15 are expected to fall 0.83% in August, according to economists polled by Bloomberg, up 0.13% compared to the previous reading.


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