Daily Market Pulse

Dollar bounces on risk-off market

7 minute read


Following Monday's risk bounce, markets appear to have turned cautious early Tuesday. In the European morning, the U.S. dollar index, which fell 0.93% at the start of the week, is showing minor daily gains. Recent weakness in U.S. economic data and business earnings, combined with positive indicators for the global economy such as Shanghai's planned reopening and U.S. President Joe Biden's statements this week pointing to a possible softening of the trade conflict with China, moved investors away from the U.S. dollar. However, reflecting the cautious mood today, stock futures are down 0.8% to 1.8% amid headlines of social media startup Snap warning of the damage to its top and bottom-line figures due to poor macroeconomic trends. Investors will now see S&P global flash PMI results as well as new house sales data. Finally, Fed Chair Powell will talk later in the day.


On Monday, the common currency reached its highest level in nearly a month and closed 1.25% higher against the U.S. dollar before losing its positive momentum on the second day of the week. Aside from the general weakening of the dollar, hawkish statements from European Central Bank (ECB) officials helped the Euro find demand and drove its rally. Having said that, President Christine Lagarde of the European Central Bank (ECB) stated that they were "likely to be in a position" to exit negative rates by the end of the third quarter, and ECB Governing Council member Francois Villeroy de Galhau stated that a deal on rate hikes in the near term was probably done. In the meantime, the S&P Global Eurozone Manufacturing PMI declined from 55.5 in April to 54.4 in May 2022. New orders declined for the first time since June 2020, and outstanding business increased at the slowest rate since August 2020, indicating weaker production requirements in the coming months. 


The British Pound gained 0.84% against the U.S. dollar on Monday. Early Tuesday, the currency remains quiet amid the reduced risk appetite. In recent news, Bank of England (BoE) Governor Andrew Bailey stated on Monday that the central bank is willing to raise interest rates further if necessary, but that tightening must take income shock into consideration. Meanwhile, the UK's April borrowing was the fourth-largest on record and above market estimates, with an £18.6 billion deficit in its public finances in April 2022, the first month of the new fiscal year, exceeding market projections of £17.9 billion. In other news, the FTSE 100 fell about 1% on Tuesday, mirroring global bearish cues as concerns about weaker growth, faster interest rate hikes, and geopolitical tensions persisted. Moving ahead, traders will also be watching for new S&P Global PMIs and the CBI's quarterly distributive trades survey.


The Japanese Yen closed 0.02% higher in Monday's session against the greenback before extending its gains this morning. Following the manufacturing data release, Investors analyzed that Japan's industrial activity rose at the slowest rate in three months, as supply constraints were caused by parts shortages and China's Covid lockdowns slowed output and new order growth. Having said that, the Jibun Bank Japan Manufacturing PMI fell to a three-month low of 53.2 in May 2022 from a final 53.5 a month earlier but indicated the 16th consecutive month of expansion as the Covid situation improved further, according to preliminary readings. Both output and new order growth slowed to their worst pace in three months, owing to supply chain delays caused by the Ukraine crisis. In other news, the Nikkei 225 Index slid 0.94% on Tuesday, while the wider Topix Index fell 0.86% after giving up gains from the previous session, as Japanese technology companies tracked weaker U.S. futures.


The Loonie surged 0.62% in yesterday's session before losing its ground on Tuesday morning. The Canadian dollar strengthened against the U.S. dollar in late May to the highest level in more than two weeks, boosted by expectations of tight monetary policy in Canada and reflecting recent moves in the greenback. Meanwhile, the Bank of Canada is poised to continue its tightening cycle at its meeting next week after consumer inflation in April exceeded expectations at 6.8%, the highest level in more than 31 years. Governor Macklem has stated that the central bank is willing to raise interest rates "forcibly if necessary" to combat growing consumer prices. Elsewhere, Canada's newest unemployment rate of 5.2% in April was in line with projections, the lowest on record. 


The Mexican Peso closed marginally higher in the last session before sliding on Tuesday morning as U.S. dollar strength sweeps in the markets. The Peso stayed strong as the U.S. dollar fell as investors assessed the reopening of Shanghai and the lessening of U.S.-China trade tensions. Meanwhile, the Mexican central bank - Banxico, raised interest rates to 7% for the eighth time in a row on May 12th, citing inflationary pressures from the Russia-Ukraine conflict and prospects of quicker global monetary policy tightening. Furthermore, because Mexico is a significant metal exporter, a rise in metal prices supported the Peso, as did the potential of lockdowns being lifted in top commodities consumer China. 


The Chinese Yuan closed 0.41% higher in Monday's session against the greenback. However, the Yuan fell in Tuesday's session as Investors dismissed China's latest steps to boost the economy in the aftermath of lockdowns. Moreover, UBS and JPMorgan have lowered their estimates for the country's economic growth this year. Investors were also watching for a market reaction after President Joe Biden floated the notion of tariff reductions on Chinese imports, indicating a potential de-escalation of trade hostilities between the United States and China. Furthermore, S&P Global forecasts China's real GDP growth to fall from 8.1% in 2021 to 4.3% in 2022, as the country is expected to maintain its zero-Covid policy through the end of this year. Elsewhere, the Shanghai Composite fell 2.41%, while the Shenzhen Component fell 3.34% on Tuesday, retreating drastically from one-month highs, on expectations of a rapid economic slowdown despite China's newest stimulus measures.


Real sustain its bullish tone and advances on the weaker U.S. dollar abroad. The Brazilian currency gained 0.54% at the beginning of the week. In addition to a U.S. dollar weakening, the positive sign came from iron ore futures contracts, which rose around 7% yesterday, following its biggest daily jump in almost 3 months. Meanwhile, after just 40 days in office, José Mauro Ferreira Coelho was fired from the presidency of Petrobras. This is the third job change during the Bolsonaro government due to the progressive rise in the prices of fuels. In replacement, the government decided to appoint Caio Mário Paes de Andrade, assistant of Minister Paulo Guedes at the Ministry of Economy, where he held the position of Secretary of Debureaucratization. Elsewhere, market participants might negatively price this exchange of chairs, as Bolsonaro tries to interfere once again with the prices of fuel to strengthen his stance ahead of the election period. On the radar, IBGE (the Brazillian Institute of Geography and Statistics) will publish IPCA-15, a preview of inflation for the month of May, later today.


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