Daily Market Pulse

The dollar climbs as Hawkish Fed supports


The U.S. Dollar Index climbed to its highest level in nearly two years early Wednesday, fueled by aggressive Fed comments and strong data releases, after climbing 0.50% the previous session. On the political front, the U.S. is set to release a new sanction package later in the day, which would allegedly include a ban on all new investments in Russia. Meanwhile, the minutes of the FOMC's March policy meeting will be released today. Policymakers have previously stated that the Fed is willing to take "stronger action" if inflation and inflation expectations warrant it. Furthermore, the Fed might begin reducing its balance sheet as early as May. In other news, debt markets came under significant selling pressure in April, with the U.S. 10-year note yield soaring above 2.63%, its highest level since March 2019. Futures on the S&P 500 lost 0.4%, while Nasdaq 100 futures declined 0.6%. Investors will be watching stories related to the Russia-Ukraine crisis as well as comments by European Central Bank (ECB) officials in the coming months.


The Euro closed 0.61% lower on Tuesday before extending its losses this morning. The common currency declined further against a strengthening dollar, moving in on an almost 2-year low set on March 7th, weighed down by fears over the bloc's economic future amid the Ukraine conflict and rising inflation. Europe and the United States are set to impose further penalties against Moscow this week in response to charges of civilian atrocities in the Ukrainian town of Bucha, including a U.S. restriction on investment and an EU prohibition on coal imports. In other news, the S&P Global Eurozone Construction PMI fell to 52.8 in March 2022 from 56.3 in February, indicating the slowest rise in global construction activity since October of last year. Companies frequently stated that concerns about rising prices and uncertainty caused by the commencement of the war in Ukraine slowed growth.


The British Pound closed 0.32% lower followed by consolidating its losses on Wednesday morning. The Cable fell as investors followed negative indications from Europe and Asia, as traders weighed the likelihood of additional penalties against Russia from Western countries, as well as hawkish remarks from a Fed member. On the data front, the S&P Global/CIPS UK Construction PMI remained constant in March 2022, at 59.1, the same as in February, and continued to signal strong growth in the construction sector, aided by the fastest increase in new work in seven months. In other news, the overall Covid prevalence rate more than doubled last month from February, with infections in England reaching their highest level in March since the pandemic began, driven by the Omicron subvariant BA.2, which has become the dominant strain in England, accounting for approximately 90% of positive samples.


The Japanese Yen closed 0.66% lower in the previous session against the greenback. The Japanese Yen fell against the U.S. dollar on Wednesday, falling for the fourth straight session and approaching its lowest level in nearly seven years, as Bank of Japan Governor Haruhiko Kuroda acknowledged the currency's rapid decline and joined other policymakers in warning that sharp falls in the Yen could harm the country's import-dependent economy. However, Japan's finance minister has ruled out any government intervention in currency markets. In the face of rising global interest rates, the central bank also stood fast in its resolve to continue significant stimulus and keep interest rates low, executing unlimited fixed-rate buy operations for 10-year government bonds last week to defend its yield objective. In other news, the Nikkei 225 Index fell 1.6%, while the broader Topix Index fell 1.3% on Wednesday, closing at their lowest levels in more than two weeks, as Japanese stocks followed Wall Street's overnight route, which was fueled by hawkish comments from the Federal Reserve.


The Loonie closed 0.02% lower in the previous session before extending its losses on Wednesday morning. The Canadian currency was trading at a level not seen since November 2021, on predictions that the Bank of Canada will begin raising its benchmark interest rate by 50 basis point increments to contain inflation, which is at levels not seen since 1991. Since May 2000, the Central bank of Canada has not raised interest rates by that much. According to the Bank of Canada's most recent business survey, many Canadian businesses are encountering capacity constraints due to severe labor shortages and continued supply chain issues, with many predicting significant wage and input price growth. According to the second study of consumer expectations, short-term inflation expectations have reached a new high, with people expecting inflation to remain over target for the next two years before falling. After reaching a new high earlier in the day, Canada's main stock index, the S&P/TSX, reversed gains and finished 0.7% lower on Tuesday. Concerns about aggressive monetary policy tightening were fuelled by comments from U.S. Federal Reserve Governor Lael Brainard, while the threat of more penalties on Russia over allegations of war crimes in Ukraine also worried markets.


The Mexican Peso plunged 0.98% yesterday and continued to lose its momentum on Wednesday morning amid a strong U.S. dollar, bolstered by the hawkish Fed and prospects of further sanctions on Russia. In the latest data reports, Consumer confidence in Mexico increased to 43.9 in March 2022, up from 43.5 the previous month, according to an upwardly revised survey. The present evaluation of households' financial condition, future expectations of households' financial status, and the current assessment of Mexico's economy all improved. Simultaneously, the proclivity to make large purchases increased dramatically. On the other hand, the indicator gauging the Mexican economy's future expectations fell. 


The Chinese Yuan closed flat in the previous session against the greenback as the Chinese market remained closed due to the Ching Ming festival. In Chinese markets today, the Caixin China General Services PMI fell to 42.0 in March 2022 from 50.2 in February, the first drop in seven months amid a new wave of COVID-19 breakouts and mobility restrictions. It was the largest drop in service activity since February 2020, as new orders fell at the fastest rate in two years and export sales decreased at the fastest rate since October 2020. In other news, as the equity markets reopened after the holiday, the Shanghai Composite rose 0.02%, while the Shenzhen Component fell 0.45% in subdued trade on Wednesday as mainland markets reopened after a two-day holiday, while investors digested data showing a sharp contraction in China's services sector activity.


The Dollar advanced 1.19% against the Brazilian currency this past Tuesday.  Real's movement was dictated by the comments mentioned above, with fears of downsizing of faster liquidity in the U.S. and possible retaliation from Russia in the face of new economic sanctions imposed by the European Union. Meanwhile, the recent appreciation of the Real, boosted by commodity exports, as well as due to its low exposure to the war in Ukraine, is expected to persist in the short term. However, the direction the currency will take in the coming months should be much more in line with the next steps taken by the Central Banks of other countries, such as the Fed and Banxico (Mexico).


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