Daily Market Pulse

Dollar recovers from recent low levels


On Wednesday, financial markets remained bumpy as trading conditions remained thin ahead of the New Year holidays. The U.S. dollar dropped this morning despite the benchmark 10-year U.S. yield increasing to a six-week high of 3.85%, extending an upward trend that began in mid-December. Still, the dollar remains underpinned by the Federal Reserve's hawkish view, with the central bank likely to tighten policy further despite economic uncertainties. Later in the session, November Pending Home Sales from the United States and the Federal Reserve Bank of Richmond's Manufacturing Index for December from the United States will be scrutinized for fresh impetus.


The euro is gaining traction today after closing with 0.22% gains yesterday. The improved market mood as a result of China's reopening supports the common currency's strength. Furthermore, the European Central Bank's hawkish stance aided the Euro. The ECB hiked rates by 50 basis points in December and stated that rates would need to climb at a relatively stable pace to combat inflation. Meanwhile, the Euro is on track to lose 7% against the U.S. dollar this year as investors sought safety amid fears of a severe economic recession in Europe due to the ongoing conflict in Ukraine, rising borrowing prices, and stubbornly high inflation.


The market opens in the UK today with the Sterling moving north against the U.S. dollar. Still, Sterling is facing headwinds as the Bank of England sounded less hawkish during its most recent meeting on December 15th. Two members of the Bank of England voted in favor of retaining interest rates at 3%, claiming that the present level of interest rates was "more than sufficient" to bring inflation back to the target range. This could mean that rate hikes will be more gradual in the future. Aside from that, investors have been grappling with the growing odds of a global recession next year as major central banks tighten policy even further.


The Japanese Yen fell against the dollar as the Bank of Japan underlined that a surprise policy revision to its yield target did not signal the beginning of the end of its huge stimulus. "The Bank will try to reach the price objective in a durable and steady manner, complemented by wage growth, by continuing with monetary easing under yield curve management," stated BOJ Governor Haruhiko Kuroda. Meanwhile, Kuroda voiced optimism that persistent labor shortages would motivate employers to raise pay and predicted that Japan's labor market would tighten further. The Fed surprisingly boosted the top limit of its tolerance band on 10-year government bonds to 0.5% from 0.25% last week while keeping its ultra-low benchmark interest rates unchanged. The action increased the benchmark 10-year JGB yield to 0.49%, the highest level since 2015.


The Loonie opens on a positive note as Canadian markets reopen following the holiday season. In the absence of any major macroeconomic data releases this week, the commodity-linked currency will be at the mercy of dollar value and external market conditions. Today's gains may be fleeting as crude oil prices begin to fall again. West Texas Intermediate crude futures fell below $79 a barrel on Wednesday after reaching a three-week high of $81 the day before, as investors weighed a Russian ban and China's current condition. In other news, investors analyzed domestic growth statistics, which pointed to a halt in November and confirmed that the Canadian economy grew by 0.1% in October as growth in service-producing industries offset losses in goods-producing industries.


The Mexican Peso was trading near levels not seen since February 2020, and it was up more than 5% since the beginning of 2022, as the central bank's aggressive tightening boosted bulls' confidence. The Bank of Mexico raised its benchmark interest rate by 50 basis points to 10.5% in December, bringing the total to 675 basis points since the tightening cycle began in June 2021. Members of the central bank's board of directors warned that inflation risks continue on the upside while expecting annual price growth of 8.6% by the end of the year.


Chinese Yuan is trading in the red today, down 0.22% vs. the U.S. dollar. The People's Bank of China injected a total of CNY 202 billion of reverse repos into the banking system on Wednesday, including CNY 189 billion through the seven-day tenor and CNY 13 billion through the 14-day tenor, while keeping the rates unchanged at 2% and 2.15%, respectively, in the latest updates. It was the eighth consecutive session of a large injection to keep the financial system's liquidity reasonable and sufficient at the end of the year. Meanwhile, treasury yields in the United States rose on rising concerns that China's reopening would add inflationary pressures to the global economy.


The Real fell over 2% on Tuesday as the market awaited the nominations of ministers who would comprise President-elect Luiz Inácio Lula da Silva's administration. Financial agents also resemble China's recent relaxation of Covid-19 control regulations. Domestically, the focus has shifted to negotiations, including Senator Simone Tebet, who has a more traditional economic character. Tebet is expected to assume the position of Minister of Planning. China stated on Monday that it would no longer require quarantine for visitors arriving in the country beginning January 8. This benefits commodities and, according to XP Investimentos, could benefit emerging markets such as Brazil.


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