Daily Market Pulse

Dollar stalls ahead of key central banks gatherings


The greenback kicked off the week capitalizing 0.55% against most of its peers amid a broader cautious sentiment ahead of U.S. and U.K policymaker's announcements later in the week. The 10-year U.S. treasury yield oscillates around 3% while the Dollar Index, a major tool used to assess the performance of the greenback against a basket of six major currencies consolidates close to its 20-year high. However, equity markets show signs of cautious optimism as stock index futures in the U.S. rise between 0.3% and 0.4% during the early hours of the Tuesday trading session, as market participants keep an eye open to Factory Orders from the U.S. to assess performance. Market participants remain focused on the upcoming Federal Reserve monetary policy gathering, where interest rates are largely expected to be raised by 50 bps in an attempt to control soaring inflation readings posted at 8.5% in the latest publication. 


The common currency closed 0.43% lower against the USD as risk flows continue to underpin the greenback in a cautious mood market. This week, market participants will stay tuned to the Federal Reserve and the Bank of England monetary policy meeting which will ignite renewed impetus across global markets. On Monday, the Garmen government solidified its position that they were not against a ban on Russian oil imports and officials confirmed that they have been preparing for a ban. German stocks suffered amid the announcement, losing over 1% during yesterday's trading session amid fears of the impact on the economy given its close relationship with Russian energy. Moreover, Josep Borrel, a top EU diplomat said earlier in the day that more Russian banks will leave the SWIFT payment network as part of a new sanction package. Coming up, Unemployment and Producer Price Index data for the euro area are set to be released in the economic docket later today. 


The British Pound recovered during the early hours of Tuesday's trading session after posting over 0.4% losses yesterday. The overall overvaluation of the dollar provides room for the technical retracement which induced cautious optimism ahead of key central bank meetings later in the week. The Bank of England will follow the Federal Reserve announcement, and British policymakers are expected to hike its benchmark rate by 25 bps following its 50 bps hike back in March. Economists' consensus suggests that volatility is going to stay longer this week especially as market participants expect ques from policymakers on the pace of its balance sheet reduction amid the broader risk-averse scenario and soaring inflation. 


The Japanese Yen solidated recent losses for the third consecutive session against the dollar, as it move sideways around its 20-year high level. Today, we expect a reduction in market liquidity in the Japanese market as these remain closed due to the constitution day holiday. However, further depreciation of the Yen still has downside risk as market participants eye the upcoming Federal Reserve monetary policy meeting where investors expect policymakers to announce a 50 bps rate hike and hints around the deployment of its balance sheet.  


The Loonie closed 0.19% down against its U.S. counterpart on Monday. The Canadian dollar fell for a second day in tandem with weakening oil prices - the WTI crude falling to $100 per barrel. The global narrative (hawkish Fed stance, risks of a new slowdown in China and Ukraine war) keeps the USD stronger and overshadows the local fundamentals. Canadian is doing well, with a resilient economic growth and tightening Bank of Canada monetary policy to control inflationary pressure due to a red hot economy. Looking ahead, investors will closely watch ADP Nonfarm Employment numbers and Bank of Canada Senior Deputy Governor Roger’s Speech later today.      


Yesterday, the Mexican peso struggled to keep trading in the green territory and fell 0.19% against the U.S. dollar. The move is due to a widespread selloff in China which is spreading over emerging markets, including Mexico. On the other hand, market participants are pricing about 310 basis points of rate hikes by December – a policy rate seen ending 2022 at around 9.6%. Such a tightening policy could provide support for the peso, although the US Fed also raising its rate could overshadow this as the dollar strengthens and US yields rise.


The worsening outlook for China is evident in all markets from stocks to currencies. Given China’s importance in global supply chains and relevance to global growth prospects, a potential slowdown in the country’s GDP might lead to increased risk-off sentiment. As a result, commodity prices, including energy and agricultural products, trade lower due to concerns about demand. Chinese markets remain closed for holidays.


The Brazilian Real dropped 2.4% against the greenback, with market players awaiting the U.S. Federal Reserve’s key policy meetings this week and assessing the potential slowdown in China’s economic growth. The local narrative will continue to drive the BRL as investors will closely monitor Brazil’s Central Bank rate decision on Wednesday, amid the view that global inflation pressure will require Selic to remain elevated for several months even if officials decide to pause the tightening cycle. Today, investors will watch industrial production numbers while President Jair Bolsonaro is assessing changes to the spending cap rule, which might pose a new threat to the fiscal budget and to the newly elected president next year. 


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