Daily Market Pulse

Dollar eases pressure amid cautious optimism


The U.S. dollar Index, a coefficient that measures the performance of the greenback compared to a basket of six major currencies, stepped down from its August highs amid a broader risk-on mood in global markets, which kept the dollar offered through the course of yesterday’s trading session. However, the dollar retreat seems to have taken a breather after China's Evergrande coupon repayment awaited fresh updates on the impending USD 83 million offshore coupon payment due yesterday, and next week’s USD 47.5 million payments, both of which have a 30-days grace period before they could be considered default. Moreover, market participants continue to digest hawkish shifts in the Fed’s and Bank of England’s monetary policy stance amid flooding optimism thanks to promising progress on the U.S. 3.5 billion spending bill. Fed tapering expectations, in combination with interest rate hike expectations, borough forward between 2022 and 2023, keeping Treasury Yields on the front foot and reaching 1.40% limiting losses for the greenback. Moreover, U.S. data failed to impress, removing support from the greenback amid Jobless claims missing expectations, alongside preliminary Markit PMIs for September, which posted disappointing results. Coming up, market participants will stay tuned to speeches from Fed officials Clarida, Bowman, and Powell, which might reignite renewed impetus in the global market.    


The EUR recovered losses that originated from the tapering announcement and monetary policy statement from Fed policymakers, amid a broader risk-on sentiment during yesterday's trading session. Hawkish Fed expectations and surging bond yields helped to limit the dollar retracement, while investors remain cautious ahead of German elections this Sunday. Chancellor Angela Merkel has joined Armin Laschet, her embattled successor, in an effort to boost his campaign. However, Olaf Scholz, the center-left candidate, remains in the lead of the polls. Moreover, German IFOs released during the early hours of today’s trading session failed to impress, suggesting low morale indicators in the German economy, which caps the potential of EUR to break the current resistance against the greenback.  


The British Pound edged higher against the dollar, capitalizing 0.8% during yesterday's trading session amid a broader risk-on sentiment and BoE inducing effervescent optimism. The Monetary Policy Committee of the Bank of England announced yesterday to keep the interest rate unchanged at 0.1% but warned of a higher inflation rate. However, two MPC members voted for an early end to the pandemic stimulus.  However, despite the encouraging intervention from Andrew Bailey, the U.K. economy continues to struggle with supply chain and Brexit woes. British Finance Minister Rishi Sunack ordered reviews of the country’s financial regulation in concert with the collapse of supply chain finance firm Greensill Capital. The U.K parliament issued a report back in July related to the risks surrounding Greensill’s collapse. Additionally, Prime Minister Boris Johnson concedes that a post-Brexit deal with the U.S. is not happening anytime in the near future, keeping cable capped. 


The Japanese Yen continues to extend losses against the dollar amid a broader risk-on sentiment weighing over the safe-haven appeal of the Japanese currency, closing 0.54% lower during yesterday's trading session. The Yen sustained pressure since the latest FOMC policy update, while investors remained optimistic that China’s Evrgrande debt crisis could be contained. Moreover, dismal economic figures underpinned the depreciation of the Yen, with the Jibun Bank Manufacturing Purchasing Managers Index declining 51.2 in September as compared to 52.7 in August, while Consumer Price Index decreased 0.4% annualized in August, after a 0.3% drop in July. Inflation continues to be below the BoJ’s core inflation target of 2%.   


The Loonie capitalized gains against the dollar, closing 0.89% higher, sponsored by restoring risk sentiment amid China’s Evergrande jitters easing down and tapering expectations from Fed officials. Moreover, bullish crude oil prices underpinned the commodity-linked currency amid improving risk sentiment underpinning risky assets and commodities. The West Texas Intermediate rallied 1.89%, reaching USD 73 per barrel, which bolstered the demand for Canadian dollars. The spike in crude oil prices comes off the back of oil inventories reports released on Wednesday, which showed that U.S. crude oil stock plumbed 414 million barrels, the lowest since October 2018. However, jitters persist around China and the impact that the Evergande crisis will have over global markets and its contagion to other companies and sectors.


The Mexican Peso retraced 0.56% against the dollar during the early hours of today’s trading session, after comments from President Lopez Obrador in relation to the U.K joining the trilateral agreement between U.S., Canada, and Mexico. Mexico’s Leader said any adjustments to the trade agreement should be unanimously agreed upon between the three North American economies. Comments from AMLO came after a report that the U.K. was weighing joining the accord, as the U.K Prime Minister visits the U.S. during a state visit during the course of this week.  The U.K is exploring options to join the trilateral agreement trade agreement known as USMCA - A recognition that the Biden administration won’t start talks on a bespoke bilateral deal with the U.K. billed as on the prizes of Brexit - any time soon. 


The Chinese Yuan advanced 0.18% against the greenback amid hopes that China's Evergrande debt crisis will be controlled, despite the firm missing its offshore payment for USD 84 million and is lacking ahead of next week's USD 47.5 million coupon payment. The firm has a 30 day grace period, which has induced optimism amongst market participants, especially after the PBoC injected liquidity into the market to ease financial conditions due to the distressed brought by Evergrande. Additionally, China’s indicators continued to suggest weakness in domestic consumption, as small-scale outbreaks of Covid-19 were reported in some regions. China recorded 470 cases, with 293 domestic infections mostly from an outbreak in the Fujian province.  


The Brazilian Real retraced 0.81% against the greenback during yesterday’s trading session, despite the BCB hiking its benchmark rate (Selic) by 100 bps. Policymakers flagged that a similar shift in policy could be expected in the upcoming meeting in October amid sustained inflationary pressures in the country. However, the BRL remains capped amid the broader political turmoil in the country and the upcoming presidential race. A boost of social programs ahead of the 2022 election is key for Bolsonaro to bolster his chances of reelection, as the government disapproval rating rises and polls show former president Lula is significantly ahead in the race.  


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