Daily Market Pulse

Dollar opens bullish amid risk-averse sentiment


With trading conditions finally returning to normal after the New Year's holiday, investors appear to have taken a cautious stance early Tuesday. The U.S. dollar index begins to rise amid the heightened volatility and as investors await additional data that will help guide the outlook for growth and monetary policy. Traders are looking forward to the release of U.S. manufacturing PMI data later today, the minutes of the most recent Federal Reserve policy meeting on Wednesday, and the December jobs report on Friday.


On Tuesday, the Euro fell more than 1% versus the dollar as investors welcomed regional German inflation data that showed a substantial decrease in pricing pressures in Europe's largest economy. Nonetheless, the Euro stayed near its best level since June, as the European Central Bank is expected to raise interest rates at a slightly slower pace to combat inflation, which remains well above the central bank's 2% target. Traders are now anticipating the release of the HICP Index on Friday, which is likely to indicate a decrease in price pressure at 9.7% year on year in December, down from 10.1% earlier. Such a downside would be good for the ECB. However, it would hurt the common currency.


Sterling fell to a multi-week low due to a lack of fundamentals and the market’s bearish pressure. In the data released today, the S&P Global/CIPS UK Manufacturing PMI was revised slightly higher to 45.3 in December 2022 from a preliminary estimate of 44.7 in November. Nonetheless, the most recent measurement was the lowest in 31 months. Meanwhile, political uncertainty in the United Kingdom appears to be weighing  on the Pound Sterling. Over the weekend, The Telegraph claimed that British Prime Minister Rishi Sunak had shelved the childcare reform, which was intended to assist parents in saving money and returning to work.


The Japanese Yen rose modestly against the dollar in early January, reaching its highest level in seven months, as speculation mounted that the Bank of Japan would soon abandon its ultra-easy policies. A recent Nikkei story stated that the central bank was considering increasing its inflation estimates in January to show a price increase near its 2% objective in fiscal 2023 and 2024. Meanwhile, the BOJ abruptly boosted the upper limit of its tolerance band on 10-year government bonds to 0.5% from 0.25% in December, sparking expectations of a hawkish turn.


So far, the Loonie is down 0.5% due to broad-based U.S. dollar strength, which is being driven ahead of Manufacturing PMI data from Canada and the U.S. As market players returned from the New Year's holiday early Tuesday, market volatility increased, and the dollar began to outperform its rivals. S&P Global will issue the December Manufacturing PMI surveys for Canada and the United States in the afternoon. The market reaction to the Canadian PMI will most likely lead to Loonie’a action. Meanwhile, the West Texas Intermediate crude oil price fluctuates in a narrow band around $80.00 as traders try to figure out how China's reopening actions will affect the energy demand picture.


The Mexican Peso gained ground against the U.S. dollar Tuesday as industrial activity in Mexico expanded further. The S&P Global Mexico Manufacturing PMI increased to 51.3 in December 2022, the fourth consecutive month of improvement in Mexican factory activity and the highest since June, expanding the previous month's reading of 50.6. Meanwhile, Mexico's seasonally adjusted manufacturing confidence index fell to 49.3 in December 2022, the lowest level since April of last year, from 49.5 in November. Traders now look forward to data releases from the U.S. today as well as Consumer Confidence from Mexico on Thursday for fresh momentum.


The Yuan rose early in the morning, reaching its highest level in four months, as China's quick reopening fueled prospects for a speedier economic recovery. However, the momentum dissipated as market volatility increased and investors flocked to the dollar during the European afternoon. Meanwhile, a private study found that China's December manufacturing activity fell the most in three months as a result of Covid-related disruptions. In other events, IMF chief Kristalina Georgieva cautioned that 2023 would be a difficult year because the primary engines of growth, especially the United States, Europe, and China, are all experiencing slowing activity. The downbeat news weighed on the Yuan, which is down 0.18% so far against the dollar.


The Real is up on Tuesday, with investors watching the signals from Finance Minister Fernando Haddad. Haddad announced the day before that he would pursue "harmonization" between fiscal and monetary policies. Haddad also noted that the Ministry of Economy would propose a proposal for a new fiscal anchor for public accounts, replacing the expenditure ceiling, in the first half of the year. Other measures mentioned included the expansion of the BRL 600 value of the Bolsa Familia and the revocation of the state-owned company privatization.


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