Daily Market Pulse

Dollar gains as U.S. treasury yields hit 1.50%

6 minute read


The U.S. dollar index, a useful tool to assess the valuation of the greenback against a basket of six major currencies, started to ease momentum ahead of Powell’s testimony later today before congress. Rising Yields and energy issues kept markets cautious, especially as shortages are gaining more traction and prices continue to soar. The U.S. Treasury yields currently test 1.50% level, following the Fed’s tapering signal last week and prospects of rising inflation, which continue to manifest in energy prices. Moreover, Jerome Powell is scheduled to testify before Congress, where he stressed that he would act against sustained inflation and that higher prices and hiring shortages could be more sustained than previously anticipated. On the other hand, he sees ongoing strong growth for the U.S. economy. However, the spokesman will emphasize that ending the bond purchase programme does not imply interest rate hikes, supporting comments from Fed official Lael Brainard. Additionally, Fed officials Michelle Bowman and Raphael Bostic are scheduled to speak later in the day. Meanwhile, Eric Rosengren and Robert Kaplan, Fed presidents for Boston and Dallas respectively, will step down from their posts before the 30th of September, after revelations of active trading around the bank’s decision. Kaplan was distinguished as a vibrant hawk and his departure could tilt the Fed towards a dovish approach.  


The EUR remains subdued against the dollar amid rising Treasury yields underpinning the demand for the dollar ahead of Jerome Powell’s testimony before congress. German Bund Yields edged down from over 2-month highs on Monday, as a sign of relief among investors as the tail risk of a leftist coalition takes shape after the national election faded. Market participants welcomed the results as that the European giant will remain in a center political stance, which suggests stability for the country. In the European docket, the European Central Bank M3 money supply expanded 7.9% annualized to August, and Private Sector loans rose 4.2% annualized. Christine Lagarde, President of the ECB, said that policymakers will keep a close eye on both wages and supply while undermining the impact of high inflation in the long-term given its transitory nature. The pair remain cautious ahead of the ECB forum at Sintra where several policymakers are expected to take the stage. 


The British Pound remains uncertain against the greenback amid the pair erasing yesterday’s gains during the early hour of the trading session. Mixed cues amid BoE rate hike signal, Brexit concerns, and higher gas prices keep Sterling in check amid broader uncertainty. The Governor of the Bank of England, Andrew Bailey, fueled momentum for the Pound after his speech to the Society of Professional Economists, where he warned that interest rate hike could come sooner than expected despite the deployment of quantitative easing. However, the Sterling gains faded away after Clement Beaune, European Affairs Minister, said the current energy crisis in Britain reflected the intellectual fraud that was Brexit. 


The Japanese Yen continues to extend losses against the dollar amid a surge in U.S. treasury yields reaching 1.50%, levels last seen in July, and printing a day trend. The Bank of Japan published its monetary policy meeting minutes from July during yesterday’s session, where policymakers reiterated the need to stand pat amid sluggish inflation, and that the central bank is expected to continue to support the economy where necessary. Datawise, Coincident Index, and Leading Economic Index sustained figures released in its latest publication, while we don’t expect any macroeconomic data to be released today.  


The Loonie sustains momentum against the dollar amid surging crude oil prices, due to hopes that pre-pandemic energy demands will propel WTI towards the yearly peak. The West Texas Intermediate (WTI) fueled out momentum after oil giant, British Petroleum, said that global oil consumption is expected to return to its pre-pandemic levels in Q3 2022, with Asia continuing as the center for oil product demand growth. Given the lack of major drivers coming from Canada during today's trading session, Fed’s Chair Powell’s testimony, and chatters over China, as well as Evergrande, will keep investors tuned.  


The Mexican Peso retraced 0.49% against the dollar amid surging U.S. Treasury yields breaking 1.50% level, underpinning the greenback’s momentum. The latest bi-weekly inflation report showed that Mexican inflation continues to rise, posting 0.42% in the first two weeks of September, pushing annualized inflation to 5.87%. The figures raised concern after government officials highlighted that the equivalent figure for 2020 posted 0.16% from an annualized reading of 4.92%. Policymakers raised its benchmark interest rate by 25 bps during its latest monetary policy meeting, setting interest rates at 4.50% in response to the 5.81% inflation reported. Banxico officials believe that inflation will close around 5.7% by the end of the year, significantly higher than its target of 3% +/- 1 range.  


The Chinese Yuan fell back 0.15% during yesterday's trading session amid rising U.S. yields providing solid support to the greenback. However, the current energy shortages are affecting several regions in China. Goldman Sachs revised down its growth forecast for China, as the country struggles with energy shortages. Economists expect the world's second-largest economy to expand 7.8% this year, down from its previous prediction of 8.2%. Major industrial output cuts come as a result of power outages in several parts of the country, adding significant downside pressures to the economic performance as authorities estimate that 44% of China’s industrial activity has been affected. The power supply crunch is caused by environmental controls, supply constraints, and soaring prices, leaving some factories and homes without electricity. 


The Brazilian Real remained subdued against the dollar, closing 1% lower during yesterday’s trading session amid surging yields providing solid support to the dollar across the board. Moreover, the BCB released its latest external sector report showing that Foreign Direct Investment grew 73% since august last year, with Brazil receiving USD 4.5 billion in FDI in 2021, up from USD 2.6 billion. However, policymakers highlighted that despite the encouraging annualized figures, July reading posted USD 6.1 billion earlier this year.


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