Daily Market Pulse

The dollar continues its ascent


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, gained 0.13% on Thursday’s closing session, followed by mild gains on Friday’s opening. The index was supported by several Fed officials’ speeches, which reinforced the idea of faster tapering, as well as a sooner-than-expected rate hike. Additionally, the U.S. Treasury yields for the 2-year note climbed by 0.62%, which provided additional support for the Dollar this morning. Meanwhile, experts anticipate that the market has already priced in two rate hikes in 2022, as well as a speedier reduction of bond purchases, which will allow for early rate hikes. Later in the session today, market participants will be looking for November’s Non-farm payrolls, followed by the unemployment rate, ISM Non-manufacturing PMI, and Markit service PMI to give fresh momentum for the Dollar index. 


The Euro fell 0.17% versus the U.S. dollar on Thursday, its second straight decrease, and traded at small gains/losses with downside pressure on Friday's opening session. The gradual recovery in the dollar, coupled with the emerging Omicron virus concerns, puts the Euro under downside pressure. Meanwhile, the European Central Bank continues to believe that inflation is temporary, and this is in line with the comment by Central Bank’s policymaker Klaas Knot, who mentioned that inflation is going to meet target expectations in the year 2022 and beyond. Furthermore, ECB president Lagarde stated that it is unlikely to see a rate hike in the next year. Moving ahead, inventors will keep an eye on November payrolls, expected at 550K, and the unemployment rate, estimated at 4.5%, to give a fresh drive for the Euro. 


The Sterling surged 0.20% against the greenback during Friday’s closing, followed by a decline to fresh daily lows during the early European trading session. The cable is observed to be oscillating in a narrow band around weekly subdued levels since the last three trading sessions. The EU-UK standstill over the Northern Ireland protocol, and worsening row over post-Brexit fishing rights between France and the UK, are the factors that are keeping a lid on Sterling’s upside movement. Furthermore, fresh buying around the U.S. dollar, amid faster tapering expectations and bill approval to fund the U.S. government in mid-February, weighs on the Sterling. Market participants will take cues from U.S. macro releases, as well as Brexit-related headlines, to give radical momentum for Sterling. 


The Japanese Yen fell 0.29% versus the U.S. Dollar on Thursday, and it continued to fall against the greenback in the early hours of the European trading session on Friday. The recovery of the risk sentiment and surge in the Treasury yields curve gives a renewed uptick for the U.S. Dollar and acts as a headwind for the Yen. Additionally, strong support is rolled out by the Fed’s hawkish tone over faster tapering and early rate hike prospects for the greenback, which in turn, weighs on the Japanese Yen. Meanwhile, for the remainder of the day, investors are paying little heed to Japan's fiscal policy expenditures for the next year, preferring to rely on the publication of U.S. docket data to offer fresh momentum for the Yen. 


The Loonie regained 0.06% against the greenback on Thursday’s closing, balancing previous session losses. The Loonie faced a fresh drop in the early hours of Friday as the U.S. Dollar traded at its highest levels versus the loonie since September, with bulls betting on strong dollar demand. Growing market acceptance that the Fed will be more aggressive in its monetary policy provided strong ground for the upwards movement. On the other hand, a further recovery in crude oil prices from its lowest levels in the previous session underpinned the Loonie to hold against, and limit, further downside. Investors might move sideways and are waiting for a  fresh catalyst from today’s key macro data release of the U.S. and Canada to place further bets across the currencies. 


The Mexican Peso surged 1.14% against the U.S. dollar on Thursday’s closing. The Mexican Peso has been on a roller coaster ride in recent weeks amid rising U.S. Treasury yields, the contagion from the Turkish Lira crisis, and concerns over the COVID-19 Omicron variant. For the Mexican Peso to recover meaningfully, investors will need clarity on the new virus variant that is appearing in many parts of the world, but for the most part, in Africa. At this time, little is known about the severity and transmissibility of the heavily mutated virus strain. Pandemic concerns aside for a moment, traders are also focused on domestic politics (Mexico) to understand how the Mexican Peso may perform in the medium term. It is worth noting how the newly elected Victoria Rodriguez will handle the monetary policy, which will give further direction for the Peso. 


The Chinese Yuan fell by 0.14% against the U.S. dollar at the closing of Thursday’s session. The offshore Yuan dropped past the U.S. dollar on Friday, easing from 6-month highs as weaker-than-expected official guidance prompted traders to trim long positions. Meanwhile, the Caixin China General Composite PMI inched lower to 51.2 in November 2021 from 51.5 a month earlier, signaling the softest growth in the private sector in three months amid sporadic COVID-19 outbreaks and related disruptions. The reading was also weaker than the long-run trend of 52.6, with a slower rise in services activity offsetting a renewed, albeit fractional, increase in manufacturing output. The Shanghai Composite Index rose 0.2%, while the Shenzhen Component Index inched up 0.05% on Friday, as mainland stocks traded cautiously and remained minimally correlated to wild fluctuations among global peers. Analysts see limited upside for the Yuan as authorities are expected to counter the Yuan’s appreciation. 


The Brazilian Real gained 0.72% against the U.S. dollar on Thursday's closing. Yesterday, despite poor third-quarter GDP, the Real benefited from a resurgence in agricultural and energy commodity futures prices, as well as a reduction in fiscal concerns with the ratification of the PEC dos Precatórios. The country entered a technical recession after the Brazilian Institute of Geography and Statistics (IBGE) published that the GDP fell 0.1% in the third quarter, following a contraction of 0.4% in the second quarter. Regardless of how the market will digest local economic weakness, technical recession, or stagnation, expectations for the fourth quarter do not look to be positive. Double-digit inflation will continue to inhibit consumption, in addition to the rise in interest rates that have postponed investment decisions by companies. The basic text of the PEC dos Precatórios, as expected, was approved for a first-round in the Senate this past Thursday. Now, the text returns to the Chamber of Deputies for its final voting. Following this, President Jair Bolsonaro must sign the document to make the law official. The outcome of this novel is already priced in the currency, and it is now only waiting for the premiere of the next one - Could it be ¨The third way¨?


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