Daily Market Pulse

Dollar continues to advance amid higher yields


The U.S. dollar index, a common tool used to assess the valuation of the greenback against a basket of six major currencies, continued to extend gains, closing 0.66% higher during yesterday’s trading session. The Federal Reserve and its imminent tapering are the main drivers behind the recent spike in U.S. Treasury yields, sustaining the dollar momentum. On the other hand, equities are on course to print another day of gains after relative calmness in the stock market comes despite several global worries, including energy outages and the Evergrande fallout, which proves the dollar strength comes from tapering expectations. Jerome Powell is set to testify for a third consecutive day before the House Committee, and will likely repeat his narrative from previous days.  In an appearance with central bank chiefs from the eurozone, the U.K., and Japan, Powell said that the Fed expects supply chain bottlenecks to ease during the mid-term. Moreover, the U.S. Senate’s majority leader, Chuck Schumer, announced that lawmakers agreed to extend government funding through to  Dec 3, averting an imminent government shutdown at the last minute. However, the U.S. economy is on route to hit the debt ceiling in mid-October, and the ambitious USD 3.5 trillion expenditure plan is in the air amid infighting in the Democrat Party. Coming up, the U.S. Gross Domestic Product for Q2 is set to be released later today, expected at 6.6% annualized, while participants expect a moderate decline in weekly jobless claims. 


The EUR posted a single-day record fall of 0.8% against the dollar amid the central bank’s divergence on tapering stance. Christine Lagarde, President of the European Central bank, is reluctant to tighten monetary policy, flagging that supply chain bottlenecks are at the heart of inflation and that there is no reason to overreact. Comments from the spokeswoman come while the Federal Reserve prepares to taper its bond purchase programme by November, pushing Treasury yields to 1.56% and underpinning the demand for dollars. Additionally, Eurozone Consumer Confidence came at -4 in September, up from -5.3 in the previous month, whereas the service sentiment dropped 15.1 in September as compared to 16.8 in August. Market participants await the German Harmonized Index of Consumer Prices, Unemployment Rate, and U.S. growth figures to renew market impetus.  


The Pound Sterling plummeted an additional 0.81% against the dollar amid broader dollar strength, U.K. petrol shortages, and unemployment jitters ahead of the end of the furlough scheme. While Britain continues to struggle with petrol shortages, recent Gross Domestic Product failed to provide any support to the Pound, after readings showed that the economy expanded by 5.5% in Q2, above the 4.8% previously anticipated by market consensus. The increasing fuel crisis keeps Sterling on the back foot due to the post-Brexit shortage of truck drivers while the end of the furlough scheme approaches. Market participants remain cautious as fewer workers are supported by the government than earlier in the pandemic, but uncertainty about the impact on unemployment persists.    


The Japanese Yen remains subdued against the dollar as rising Yields underpin the greenback’s demand, closing 0.48% lower and printing its 6th consecutive day recording losses. Hawkish Fed expectations and risk-on mood support prospects for a further appreciation of the dollar, as the safe-haven appeal of the Yen, is undermined by compromised fundamentals. Following the election of Fumio Kishida, which had little or no impact on the pair, U.S. drivers continue to be the main component behind the price action. Investors eye Fed Chair Powell’s testimony before Congress, and U.S. bond yields will likely influence the greenback’s valuation against most of its peers. Market risk sentiment will be a welcome input for short-term swings. 


The Canadian dollar attempts a bounce back from yesterday’s 0.53% retracement against the dollar. The Loonie remains subdued amid an unexpected rise in U.S. crude inventories, which have added pressure over crude oil prices. The West Texas Intermediate (WTI) ended down 46 cents, equivalent to a 0.6% depreciation closing down the session at USD 74.83 per barrel. Additionally, producer prices in Canada fell by 0.3% in August from July, while annualized figures showed these were up 14.3% from August last year. Canadian Prime Minister Justin Trudeau announced that he will swear in his cabinet next month, with Christia Freeland returning as Finance Minister. Datawise, market participants await for Canadian Gross Domestic Product figures due on Friday, which could provide clues on the Bank of Canada policy outlook.  


The Mexican Peso plunged an additional 0.92% against the dollar due to a broader dollar strength arising from the spike in U.S. Treasury yields and shift in tapering expectations. However, encouraging results from the latest national employment survey failed to capitalize on any gains during yesterday’s trading session. The unemployment rate in Mexico reached 4.3% in August, a significant improvement from the 5.3% recorded in August 2020, after the fresh impact of the coronavirus pandemic. Moreover, the job reports showed that the economically active population grew by 5.2 million compared to August 2020 and that the underemployment rate fell to 13% from 16% in August 2020. 


The Chinese Yuan fell 0.23% against the dollar due to rising yields in the U.S. and energy cuts in China. The country has, in the past, struggled to balance electricity supplies with demand, which has often left many of China’s provinces at risk of power outages. The current crisis is particularly serious in China’s northeastern industrial hubs as winter approaches - and is something that could have implications for the rest of the world. As the reopening of global economies comes, demand for Chinese goods surges and the factories making them need more power to meet the production demand. Rules imposed by Beijing in an attempt to make the country carbon neutral by 2060 have seen coal production slow, even as the country still relies on coal for more than half of its power. 


The Brazilian Real advanced 0.24% against a dollar amid rising U.S. treasury yields and strong inflationary pressures in Brazil which obliged policymakers to tighten monetary policy. Brazil’s economic minister announced the latest government primary deficit, which showed that the federal government recorded USD 1.82 billion in August this year, showing a deficit reduction of 86%. Government officials say the result is due to the positive evolution of the tax take, as well as “more targeted” spending in response to the coronavirus pandemic. Jefferson Bittencourt, the secretary of the federal treasury, has noted that the central government would be recording a surplus were it not for the ongoing pandemic spending.


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