Daily Market Pulse

Dollar regains as volatility is back in the markets

6 minute read


The U.S. dollar index regained its traction on Thursday morning after having dropped more than 2% in the previous two sessions to its lowest level in more than a month. Growing predictions that the Federal Reserve will begin reducing the pace of interest rate hikes later this year undermined the dollar. The Fed is largely expected to raise interest rates for the fourth time in a row in November, though markets have begun to speculate that it would be less aggressive in December due to concerns about overtightening and its impact on GDP. In other news, the U.S. economy is expected to grow an annualized 2.4% quarter on quarter in the three months to September 2022, rebounding from a 0.6% decline in Q2 and a 1.6% decline in Q1. Additionally, traders will also see the European Central Bank's monetary policy decision today.


The Euro held above the parity level on Thursday, close to six-week highs, as investors await the European Central Bank to raise policy rates by 75 basis points (bps), the second consecutive increase, pushing borrowing costs to their highest since early 2009 in order to curb inflation, which reached a record 9.9% in September. Simultaneously, officials have already signaled the need to begin unwinding the EUR 5 trillion in government bonds on the bank's balance sheet and toughen loan conditions, putting pressure on European banks.


The British Pound was sliding down this morning after a 1.3% spike yesterday as market volatility returned. Investors continued to digest a barrage of earnings data while abstaining from initiating new positions ahead of the European Central Bank's highly anticipated meeting, where officials are expected to raise rates by 75 basis points. On the statistical front, the balance of the retail sale in the UK increased to 18 in October 2022 from -20 in September, according to the CBI distributive trades survey. In October, retail sales were considered as good for the time of year (+20%), following relatively disappointing seasonal volumes (-7%) the previous month. Retailers anticipate a small drop in sales volume next month.


The Japanese Yen rose against the dollar early today but gave up its upside as the volatility ramped up in the market. Early today, Yen surged towards reaching its highest level in over two weeks, as the dollar fell dramatically versus key rivals amid growing expectations that the U.S. Federal Reserve may soon halt the pace of its rate hikes. The Yen also recovered after hitting a 32-year low, prompting Japanese authorities to interfere in the currency market again. As per the Financial Times, the government likely spent $30 billion on its most recent Yen purchases. Meanwhile, when the Bank of Japan publishes its policy decision this week, it is widely expected to retain ultra-low interest rates in order to help the economic recovery. Finance Minister Shunichi Suzuki argued that monetary easing to encourage wage growth and currency intervention to safeguard the Yen are not mutually exclusive.


The Canadian dollar is losing ground after rising 0.40% yesterday. Yesterday, the Loonie advanced to trade near the highest since October 5th as investors digested the Bank of Canada's interest rate decision. As the economy shows signs of a sharp slowdown, the Bank of Canada unexpectedly slowed the pace of interest-rate hikes. On Wednesday, policymakers raised the key rate by 50 basis points to 3.75%, which was less than the 75 basis point increase expected by markets. Meanwhile, the latest Monetary Policy Report predicts that the Canadian economy will grow at a slower 3.25% this year and less than 1% the following year.


After losing 0.31% yesterday, the Mexican Peso maintained its downward trajectory today. The Peso plummeted in accordance with the Mexican 10-year yield, which fell by about seven basis points. Meanwhile, according to the most recent data, the Mexican unemployment rate fell to 3.3% in September 2022 from 4.2% the previous year, above market predictions of 3.5%. In other news, Mexico recorded a trade deficit of USD 0.90 billion in September 2022, down from USD 2.32 billion in the same month in 2021 and compared with market estimates of a USD 4.82 billion shortfall. It was the narrowest trade difference in six months, with exports increasing by 25.4% year on year, representing a 30.8% increase in oil sales and a 25% increase in non-oil exports.


The Yuan fell versus the dollar, erasing almost a third of recent gains that were likely driven by indirect intervention, as investors worried about increasing Covid bans in Chinese cities, which could further drag on the economy. China recorded more than 1,000 new Covid cases for the third day in a row, leading cities such as Wuhan and Xining to step up Covid control measures in order to halt spreading outbreaks. China's varied monetary policies, as well as policy and economic concerns in the country following President Xi Jinping's consolidation of power, continue to put pressure on the currency. Meanwhile, the Yuan has rallied dramatically from a record low set earlier this week following reports that large Chinese state-owned banks sold dollars in both onshore and offshore markets to support the faltering Yuan.


Brazilian Real plunged 1.2% versus the U.S. dollar yesterday as investors evaluated increased corporate earnings and uncertainties surrounding Brazil's upcoming elections. Meanwhile, the Central Bank of Brazil opted to maintain the Selic rate at 13.75% on October 26th, 2022, as expected. Also, Brazil's inflation rate fell further to 7.71% in September 2022, from 8.73% the previous month, the first time it has been out of double digits in a year. Policymakers observed that the Brazilian economy remained resilient, with the most recent indications indicating expansion. In other news, Brazil's economy added employment for the ninth straight month in September, above market expectations.


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