Daily Market Pulse

Dollar slips amid an improved market mood


The dollar index consolidated its gains on Tuesday after closing 0.30% higher in the previous session as traders increased their wagers for a more aggressive Federal Reserve monetary tightening, causing the U.S. dollar index to rise to its highest level in over two years. On the data front, according to preliminary estimates, wholesale inventories in the United States increased 2.1% month over month to $814.8 billion in February 2022, following an upwardly revised 1.1% gain in January. The market atmosphere continues generally optimistic as the European session begins, with U.S. stock index futures climbing 0.2% and the benchmark 10-year U.S.Treasury bond yield remaining relatively quiet below 2.5% after touching a multi-year high of 2.55% on Monday. Stocks rose Tuesday as a drop in oil and upcoming cease-fire talks between Russia and Ukraine helped sentiment. Meanwhile, the latest report indicates that Russia will no longer demand that Ukraine be "denazified" in future talks. Coming up, the Conference Board's Consumer Confidence Index and the January Housing Price Index will be featured on the U.S. economic docket later in the day.


The Euro closed 0.05% lower on Monday before regaining its momentum on Tuesday morning as the upcoming cease-fire talks between Russia and Ukraine lifted the risk-off sentiments. The pressure on the common currency was caused by a general dollar gain following statements from Fed Chair Janet Yellen predicting a 50 basis point rate hike in May, which drove a rush to the dollar. In Europe, the prospects of the European Central Bank (ECB) raising interest rates faster this year to combat inflation are increasing, with money markets pricing four quarter-point increases in 2022, the most since before the financial crisis. In addition, data later this week are projected to indicate that the headline HICP rate in the Eurozone increased again in March, reaching a new all-time high of 6.5% year on year, up from 5.9% in February. In other news, the Stoxx Europe 600 Index rose, with auto and consumer firms leading the way. Oil fell on fears that China's mobility restrictions against a Covid revival would sap consumption.


The Pound Sterling closed 0.80% lower in the last session followed by recovering its momentum today morning amid the improved market mood.  The British pound came under pressure as investors awaited more hints on the next monetary policy measures after the Bank of England (BoE) softened its tone during the March meeting, while the Fed said it may raise rates by 50 basis points in the next sessions if necessary. In addition, Bank of England Governor Andrew Bailey stated that the impact of rising energy prices on inflation-adjusted salaries in the United Kingdom will be greater than in any year during the 1970s. Meanwhile, on the domestic front, police in the United Kingdom said they will recommend 20 fines for staff and officials close to Boris Johnson for parties held during the pandemic that violated government laws aimed at preventing the spread of coronavirus. In other news, the FTSE 100 was up over 1% on Tuesday after being little changed in the previous four sessions, reflecting overnight advances in Asian and U.S. stock markets amid a generally hopeful atmosphere following another round of peace talks between Ukraine and Russia. Moving forward, there will be a flurry of economic data releases, but investors will be focused on geopolitical developments.


The Japanese Yen plunged 1.5% in the previous session against the greenback. The Yen stayed weaker against the U.S. dollar on Tuesday, after falling as much as 2.5% to a 6-year low in the previous session as the Bank of Japan intervened to keep bond rates within its key target at a time when they are increasing substantially elsewhere. A rise in commodity and food prices, as well as growing geopolitical risks as a result of Russia's invasion of Ukraine, might exert significant downward pressure on the Japanese economy, according to the Bank of Japan's (BoJ) summary of viewpoints. In addition, BOJ added that as a result of the sanctions imposed on Moscow, the activities of Japanese enterprises that have invested in the nation have been restricted. Meanwhile, Japan's jobless rate was 2.7% in February 2022, compared to market expectations, and 2.8% in January. In other news, Japan's former top currency diplomat, Eisuke Sakakibara, said Monday that the government should interfere in currency markets or boost interest rates to protect the Yen if it falls further against the greenback. 


The Loonie closed 0.28% lower in the previous session before regaining its steam on Tuesday morning. The Canadian currency fell against the U.S. dollar, retreating from a 2-month high achieved the previous day as oil prices fell and speculators priced in increasing rate rise bets. Oil, one of Canada's key exports, slumped on fears of decreased Chinese fuel demand after Shanghai declared a gradual lockdown to handle the rising COVID cases. Meanwhile, the Bank of Canada is likely to raise interest rates by 50 basis points at its April 13th meeting, and by another 200 basis points this year, after raising borrowing costs for the first time since March 2020. In other news, the S&P/TSX Composite Index fell 0.13% on Monday, halting a two-session rally and matching a reversal in the energy sector as oil prices fell on concerns about demand from main user China.


The Mexican Peso closed 0.54% lower yesterday against the greenback before recovering its momentum on Tuesday morning as investors gained confidence ahead of Russia-Ukraine cease-fire talks. On the statistical front, Mexican economic activity increased 1.8% year on year in January 2022, up from 1.3% in December and in line with market expectations. Furthermore, Mexico's trade surplus shrank dramatically to USD 1.293 billion in February 2022, down from USD 2.688 billion in the same month the previous year, falling short of market estimates of a USD 0.5 billion gap. In other news, Mexico's central bank, Banxico, hiked interest rates for the seventh time in a row, to 6.5%, to reduce inflationary pressures caused by the Ukraine conflict. The bank now predicts inflation to be 5.5% in the fourth quarter of the year, up from 4% in February, with convergence to the 3% objective predicted only in the first quarter of 2024.


The Chinese Yuan closed marginally lower in the previous session against the greenback. The Yuan remained under pressure on Tuesday as the reimposition of Covid lockdowns and increasing commodity prices pose dangers to China's economic growth. Analysts are increasingly skeptical that China can meet its 5.5% GDP growth target this year, owing to escalating economic constraints. The likelihood of additional monetary easing, with another reduction in China's reserve requirement ratio predicted in the second quarter, at a time when global central banks are raising interest rates, could also accelerate capital outflows and further weaken the Yuan. The People's Bank of China's easing bias contrasted sharply with the Federal Reserve's, with U.S. policymakers showing a willingness to tighten policy more forcefully to battle inflation. Elsewhere, On Tuesday, the Shanghai Composite fell 0.3 percent to 3,204, while the Shenzhen Component fell 0.5 percent to 11,895, dragged lower by clean energy and technology stocks, as mainland shares remained under pressure from a phased lockdown in Shanghai that restricted movement and disrupted business operations.


The Brazilian currency interrupted a long streak of 8 consecutive gains against the greenback yesterday, in a day characterized by a significant demand for the U.S. dollar in the global markets, presumably as a result of the jump in the U.S. Treasury yields. In addition, the new comments by Central Bank President Roberto Campos reiterated the municipality's intention to end the cycle of monetary tightening with the SELIC rate at 12.75% in May. However, market agents continue to speculate that the Central Bank may change depending on new inflation data. Meanwhile, in general, Real should continue to be supported at current levels, supported by the level of interest rates and the favorable wind of commodities. However, the Fed's move makes a more challenging environment for domestic assets, amidst the uncertainties in Eastern Europe. If there are advances towards a peace agreement, commodity prices may be sharply corrected.


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