Daily Market Pulse

Dollar struggles after a holiday period


Following a gain (0.20%) on Wednesday, the U.S. dollar Index fell early Thursday as market sentiment improved. As a result, the dollar is trading near its lowest levels in six months and retaining losses from earlier this week due to the surprise hawkish action by the Bank of Japan, which rose the upper limit of its tolerance band on 10-year government bonds to 0.5% from 0.25%. The dollar was also under pressure from expectations that the Federal Reserve's additional monetary tightening might send the world's largest economy into recession next year. Moving on, traders will be looking for fresh impetus as the final estimate for Q3 GDP growth will be released today.


The Euro surged throughout the Asian trading hours on Thursday, aided by selling pressure on the U.S. dollar. In the latest report, Germany's GfK Consumer Sentiment Measure remained in deep freeze at -37.8, however the index has been inching higher as energy costs have stabilized. Still, the German consumer is pessimistic. Domestically, rising interest rates and high inflation are squeezing consumers, while the war in Ukraine, which has reduced economic activity, shows little indications of easing anytime soon. The German data echoed Tuesday's eurozone consumer confidence report, which showed dismal stats.


Sterling fell slightly from a six-month high in the early European morning on Thursday, following the announcement of GDP figures. Fresh figures show that the British economy contracted slightly more than projected in the third quarter, 0.3% against expectations of 0.2%, with household spending and business investment decreasing sharply, raising concerns that the UK economy is tipping into a recession. Meanwhile, investors are weighing a less hawkish Bank of England and economic expectations. On December 15th, policymakers in the United Kingdom issued an expected half-point hike in interest rates, the ninth in a row, but indicated inflation had peaked, implying a pause in current policy tightening next year.


The Japanese Yen surged against the dollar today, returning to a four-month high after the Bank of Japan unexpectedly increased the upper limit of its tolerance band on 10-year government bonds to 0.5% from 0.25% while keeping its ultra-low benchmark interest rates unchanged. Meanwhile, the index of leading economic indicators in Japan, which is a gauge of the economy a few months ahead and is compiled using data such as job offers and consumer sentiment, was revised lower to 98.6 in October 2022 from a preliminary reading of 99.0 and after a final reading of 98.2 in September, amid growing concerns about a global economic slowdown.


The Loonie is slightly lower today after closing practically flat on Wednesday. The latest CPI statistics did not provide the Loonie with any additional traction. Investors were looking for signs of the Bank of Canada's impending policy decisions as they absorbed the latest domestic CPI print. In Canada, inflation fell slightly to 6.8% from 6.9% the previous month, but it was still above market expectations of 6.7%. The outcome had no impact on expectations for the Bank of Canada's guidance, as the Loonie and government bond yields remained broadly unchanged, with investors anticipating the central bank's tightening cycle to stop shortly, based on policymakers' signals at the previous meeting.


The Mexican Peso extended its gains for the third day, mirroring a more bullish global risk environment as U.S. treasury yields fell. The most key local data point in the rest of 2022 is mid-December inflation, which is expected today. Meanwhile, the Mexican Peso is primed for a breakout year in 2023, with investors citing the currency's regional safe-haven status as a reason for optimism. Even after a recent episode of weakness, the Peso is one of the year's best performers among major currencies, up more than 4% in 2022. According to Bloomberg data, it has also been a winner in terms of carrying, returning more than 10% this year to investors who borrowed in low-yielding U.S. dollars to buy higher-yielding Pesos. According to Commodity Futures Trading Commission statistics, speculators are utilizing the end-of-year rout to increase bullish Peso bets to the biggest level since 2017.


The Chinese Yuan remained steady today following the People's Bank of China's latest attempt to increase liquidity. On Thursday, the People's Bank of China injected a total of CNY 157 billion of reverse repos into the banking system, comprising CNY 4 billion through the seven-day tenor and CNY 153 billion through the 14-day tenor, while maintaining the rates at 2% and 2.15%, respectively. The measure, according to the central bank, aims to preserve reasonable and sufficient liquidity in the banking system by the end of the year. To ensure stable and sound financial operations, the central bank stated that it would prioritize risk mitigation in the real estate sector, platform firms, important enterprises, and medium and small financial institutions.


Today, the Real remains stable after Congress adopted the PEC, which raises the spending ceiling for a shorter period of validity while traders continue to focus on GDP data and the U.S. labor market. Domestically, Congress adopted the Constitutional Amendment Proposal (PEC) that raises the spending ceiling - it permits the value of the Auxlio Brasil (which will be renamed Bolsa Familia) to remain at R$ 600 and modify the minimum salary above inflation. Traders are now waiting for the final estimate of the U.S. GDP for the third quarter, which is estimated to expand at an annualized pace of 2.9%.


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