Daily Market Pulse

Greenback strength amid risk-off flows and rising U.S. yields


The U.S. dollar index, a common tool used to assess the valuation of the greenback against a basket of six major currencies, advanced 0.27% during the early hours of Wednesday morning, amid a sour market mood sponsored by surging energy costs and U.S. treasury yields edging higher. The West Texas Intermediate (WTI) reached USD 79 per barrel during yesterday’s trading session, following the OPEC + decision to cautiously increase production only by 400,000 barrels per day in order to control surplus elsewhere. Natural gas prices continue to rise, threatening to cripple the global recovery ahead of winter, and several European countries want to coordinate policy. Moreover, U.S. Treasury yields topped 1.57%, the highest since June, providing a tailwind to the dollar amid upcoming non-farm payrolls on Friday and tapering expectations. Additionally, the ISM Services Purchasing Managers’ Index exceeded expectations, posting 61.9 vs 60 previously anticipated alongside robust Composite readings. Coming up, ADP private-sector jobs reports for September will serve as an important hint towards Friday’s all-important Nonfarm payrolls, which will be key drivers for policymakers to proceed with tapering in November. Moreover, President Joe Biden is still working against time as the U.S. is expected to hit its debt ceiling by the 18th of October, and Republicans remain reluctant to prevent default on debt. Democrats continue clashing on the spending bill, trying to find common ground with their Republican counterparts, with some suggesting it would come down from USD 3.5 trillion to USD 2 trillion.     


The EUR extended losses during the early hours of the trading session (-0.33%) against the dollar, recording new year-to-date lows and hitting prices last seen since July 2020. The energy crisis keeps weighing on the common currency amid fears that European households may struggle to pay the heating bills in the upcoming winter. Concerns of an outright shutdown in industries in the eurozone and abroad are inducing a broader risk-off sentiment, underpinning the greenback, in addition to soaring Treasury yields ahead of job reports. Moreover, Producer Price Index figures failed to impress during yesterday’s trading session, posting 13.4% vs 13.5% previously anticipated, as well as today’s retail sales, which was expected to expand 0.8% in August after a disappointing 2.3% contraction in July, posting a shy 0.3% monthly change. Nonetheless, today, the ECB will have its Non-monetary policy meeting, and tomorrow, we will have several ECB officials intervening to conclude the week of ECB meetings. 


The British Pound momentum fades during the early hours of Wednesday as the petrol crisis and Brexit woes continue to weigh on the prospects of growth for the U.K. economy ahead of winter. Moreover, the U.K.’s Prime Minister Boris Johnson said that the U.K. fuel crisis is now “abating”, even if it could take weeks for fuel supply to normalize. Additionally, Brexit friction further dampened the market sentiment, as the U.K hit back at France over its threat to Britain’s electricity supplies complying with its dispute over fishing rights, escalating post-Brexit tension between the two countries. Today, market participants remain tuned to U.K construction PMIs and U.S. ADP employment change. 


The Japanese Yen fell back 0.53% against the dollar during yesterday’s trading session amid broader dollar strength, underpinned by soaring U.S. Treasury Yields and risk sentiment. Mixed economic data, the U.S. senate’s spending bill deadlock and U.S. treasury yields reaching 1.57% during yesterday trading session bolstered the demand for the dollar, while the Yen failed to capitalize on its safe-haven appeal despite the global energy crisis, which keeps decreasing prospects for the upcoming winter and its impact over the economic recovery. 


The Loonie fell back 0.55% against the dollar during the early hours of today’s trading session, despite soaring crude oil prices, which should underpin the commodities-linked currency.  The West Texas Intermediate (WTI) advanced for its fifth consecutive session, hitting USD 79.40 during Asian trading hours and reaching a seven-year high. The rise continued as of Monday, as the OPEC+ stuck to the 400,000 barrel per day limited increase quota in order to control surplus over global markets. Market participants expect a boost in crude output as demand has increased from surging natural prices and more expensive electricity across Europe. Additionally, the Trade Balance showed a surplus of 1.94 billion vs 0.43 Billion previously anticipated, exceeding expectations. According to the trade reports, exports grew 0.8% in August, whereas imports contracted 1.4%. Furthermore, export of energy products increased 5.1% for August to 12 billion, the highest level since March 2014 amid higher commodity and energy prices. 


The Mexican Peso slid 1.53% against the dollar during the early hours of the trading session amid a broader greenback strength and central bankers warning of further tightening in monetary policy.  The broader dollar strength comes off the back of rising Treasury Yields reaching 1.57%, while market participants remain spooked by soaring energy prices which kept market moods low. Moreover, Jonathan Heath, deputy governor of Banxico, said that the tightening monetary policy cycle is not yet over and that market participants should expect one or two more increases amid inflation concerns driven by supply chain bottlenecks and soaring energy prices. 


The Chinese market remains closed amid the Golden week holiday which is due to finish on the 7th of October. The People’s Bank of China (PBoC) governor Yi Gang said yesterday that he strongly believes that the central bank should not carry out quantitative easing despite the current financial distress, amid Evergrande’s fallout and contagion. The spokesman said that China has a potential growth rate between 5% and 6%, which allows it to conduct conventional monetary policy, and that QE should be viewed as a last resort option. 


The Brazilian  Real edged 0.36% lower against the dollar, looking to break a multi-month low level amid broader dollar strength and risk-off mood in global markets. The national federation of automobile dealers revised down its sales forecast for this year, as global shortages of component soaring energy prices have affected the recovery for sales following the impact of the pandemic. The report showed that sales fell 4.43% compared to August and 14.37% year on year. The reduction is most significant for cars and light commercial vehicles, which saw a contraction of 10.19% in September and over 28% since 1 year ago. 


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