Daily Market Pulse

Dollar loses momentum after two days of gains


After closing the previous two days in positive territory, the U.S. dollar is falling today, losing 0.18%. Nonetheless, the dollar is being supported by market caution amid rising concerns that China's reopening may add inflationary pressures to the global economy and lead to an increase in infections globally. The dollar is also underpinned by the Federal Reserve's hawkish view, with the central bank likely to tighten policy further despite economic uncertainties. Earlier in December, the Fed lifted interest rates by a mild 50 basis point increase but signaled that the terminal rate could reach 5.1% next year, which was higher than markets expected. The dollar index has fallen over 10% since reaching a 20-year high in September, but it is still up roughly 9% this year, thanks to the Fed's unprecedented tightening effort.


The Euro fell (0.26%) and closed in the red on Wednesday but has regained traction today, taking advantage of dollar dumping. Meanwhile, Fresh figures showed that Loans to households in the Euro Area rose 4.1% year-on-year in November of 2022, the least in a year and moving further away from a near 14-year high of 4.6% hit in May, as rising borrowing costs and stubbornly high inflation hit demand. Furthermore, business credit increased by 8.4%, down from 8.9% in October. However, the Euro is not much affected by the statistics. Moving forward, the external market sentiment would provide additional impetus.


Sterling attempts to remain steady this morning following small losses (0.06%) yesterday. Meanwhile, the Pound remains significantly below its six-month high, as the Bank of England has signaled a less hawkish posture following a 0.5% interest rate hike in the December meeting. This has fueled predictions of easy monetary tightening in the coming year, acting as a drag on the Pound. Aside from that, growing coronavirus infections in China have alarmed investors, with several nations, including the United States and Italy, already requiring Chinese visitors to undergo testing. Furthermore, investors were concerned about next year's macroeconomic difficulties, with additional interest rate hikes and a probable recession on the horizon.


The Japanese Yen gained ground on Thursday, putting a halt to the dollar rally. JPY gained around 0.52% against the greenback during the European session. This week has been marked by low liquidity, with many traders closing their books or taking a holiday at the end of the year. Japanese markets have been open all week, and the Yen has moved more than the other major currencies. Meanwhile, the Bank of Japan has attempted to discourage expectations about more yield curve revisions. The Bank announced unlimited bond purchases on Wednesday and again today, with the goal of defending its yield curve target of roughly 0% for 10-year bonds. Investors remain skeptical, with speculation growing that the BoJ may raise the cap to 0.75% or abandon its yield curve control entirely.


The Loonie is gaining ground after falling 0.62% yesterday, which was exacerbated by the cautious market tone. Also, crude oil prices fell as growing Covid cases in China increased concerns about weaker energy demand for the world's largest importer, dumping the Loonie. Meanwhile, ING reported that the Bank of Canada (BoC) was emerging as a dovish outlier in the G10 region, with the latest 50bps rate hike accompanied by strong signs that it might be the last hike of this cycle. This could be a headwind for Loonie starting next year.


The Mexican Peso rose (0.28%) for the first time this week on Wednesday, as the Latin American currencies rose, with the region leading advances among emerging-market peers. Meanwhile, Mexico was upgraded to overweight from neutral at Bradesco BBI, which expects the country's stocks to profit from the commencement of monetary easing in the second half of 2023, according to strategists led by Andre Carvalho. Today, the Peso maintains its advances in the face of selling pressure on the dollar.


The Yuan is up 0.22% on the day, despite growing concerns that the end of China's zero-Covid policy may result in an increase in cases around the world, triggering global restrictions. The United States declared that air travelers from China would be required to demonstrate a negative viral test, while Italy said it would test arrivals from the Asian country and revealed that over half of passengers on two flights from China to Milan tested positive. In other news, the People's Bank of China injected a total of CNY 202 billion in reverse repos into the banking system on Wednesday, the eighth consecutive session of the large injection to maintain reasonable and sufficient liquidity in the banking system at the end of the year.


The Real is trading lower against the dollar today. The composition of President-elect Lula's ministerial team, signs of his economic team, and the process of reopening China are all on investors' radars. On the domestic front, investors are watching the establishment of President-elect Lula's ministerial team, which was announced today. Senator Simone Tebet (MDB-MS), who was quoted to assume the Ministry of Planning, is the most celebrated name among economic agents. The main issue in the external scenario is still China's economy. Investors are afraid that the increase in Covid cases will have an impact on demand in the world's second-largest economy.


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