Daily Market Pulse

The Dollar loses amid geopolitical chaos and Omicron


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, edged 0.04% higher during Tuesday’s closing session. The US dollar index steps back from this week’s high trades and towards fresh intraday lows during Wednesday's Asian trading session. This is due to sliding US treasury yields and cautious optimism around the Omicron variant as well as the absence of major data/event releases. Hospitalizations continue to hint that the new Covid variant has milder symptoms, while studies show that the Pfizer vaccines provide partial protection. Meanwhile, the geopolitical stories involving the rift between Washington and the Kremlin and the doubts regarding the capacity of Chinese real-estate businesses Evergrande and Kaisa to repay the debt after barely paying the interest to add to market skepticism. Moving ahead, market participants will take hints from broader market sentiments amid the absence of any major data release today.


The Euro suffered 0.16% against the U.S. dollar towards the end of Tuesday’s session, followed by it regaining its modest upward movement in the early hours of the European trading session. Euro is attempting to rise from weekly lows, however, traders are not placing bets amid a lack of any relevant macro data. Meanwhile, Euro traders are cautious due to monetary policy divergence between the Federal Reserve and European Central Bank, which might increase further upon release of inflation data in the U.S. this week. Additionally, Vice President Luis de Guindos of the European Central Bank (ECB) reviewed the inflation projection, stating that the current phase of inflation might extend longer than expected, and inflation risks are biased to the upside. Moving forward, the headlines from China and Russia as well as Omicron, in absence of economic data, will shape the direction for the Euro and risk flows. 


The Sterling declined 0.15% against the greenback during Tuesday’s closing, followed by a mild gain on the back of the modestly weak US dollar as the European trading session began. The UK-EU impasse over the Northern Ireland Protocol held back traders from placing aggressive bullish bets and capped gains for the Sterling. Additionally, global risk sentiments remain well supported by the easing concerns over the Omicron virus while the geopolitical tensions keep fading the market sentiments. Meanwhile, Investors are convinced that the Fed will adopt a more aggressive policy to contain the skyrocketing inflation, hence, the market is waiting for the US Consumer Price Index data to influence the Sterling and US dollar price mechanism. In the latter part of the day, traders will take cues from market sentiments, Omicron virus-related headlines, and US dollar price dynamics to look out for short-term trading opportunities around Sterling. 


The Japanese Yen declined 0.11% against the U.S. dollar on Tuesday’s closing session followed by regaining its momentum on Wednesday, posting modest gains during the early European session. A combination of factors allowed the Yen to trim its losses and edge higher against the greenback. The U.S. recently stated its intention to boycott the Winter Olympics in Beijing in order to protest China's alleged abuses of human rights and acts against Uyghur Muslims. Similarly, ties between the U.S. and Russia deteriorated when US President Joe Biden warned that the US would impose sanctions on Russia if it invaded Ukraine. The US dollar's fall, however, has been cushioned, at least for the time being, by the prospects of the Fed tightening policy sooner rather than later. Traders, in the absence of major economic data release, will use the wider market risk sentiment to identify short-term opportunities around the Yen. 


The Loonie surged by 0.92% against the greenback on Tuesday’s closing. The Loonie closed higher against the dollar for the third consecutive day amid high crude oil prices. The Loonie is recovering its September losses and is trading at a 12 day high. Stronger readings of Canada's International Merchandise Trade for October and the Ivey Purchasing Managers Index for November supported the Canadian dollar.  Traders will be looking for the Bank of Canada’s (BoC) interest rate decision today and BoC’s rate hike decision as it has ended the bond purchase program in October. Traders anticipate that the benchmark interest rate will remain unchanged at 0.25%.


The Mexican Peso rose 0.89% against the U.S. dollar during the previous day’s closing, recording its second consecutive day registering gains versus the greenback. This is attributed to the stronger consumer confidence index results in the week. Meanwhile, the Mexican Peso is influenced by a number of things. Crude oil enjoyed a price surge on Tuesday and extended the strength for the Peso. Similarly, the Peso surged as a result of the Chinese central bank's move to reduce bank reserve requirements, which boosted metal prices in anticipation that Chinese economic activity would improve. China is one of the world's largest metal users, and improved economic conditions there lead to increased demand for Latin American commodities exports. Looking ahead, traders will take hints from US dollar price dynamics to find short-term trading opportunities for the Peso. 


The Chinese Yuan edged 0.16% higher against the U.S. dollar at the closing of Tuesday’s session. The offshore Yuan continues ticking higher for the second consecutive day and trades around three and a half year high levels versus the greenback. News that the People's Bank of China would cut the reserve requirement ratio for banks by 50 bps, effective from December 15th, continued to support risk appetite. The Hang Seng index, on the other hand, was trading with tepid gains/losses as problems in China's property industry reappeared. Trading in Kaisa Holdings shares was halted for the second time in two months as the company's offshore debt was unlikely to be met. Meanwhile, Evergrande Group's stock plummeted to an all-time low as the developer again missed its interest payment deadline. 


The Brazilian Real took a leap of 1.34% against the U.S. dollar on the previous day’s closing. The weakening concerns over the new Covid-19 variant trigger the risk-taking sentiment in global markets. This feeling mainly favored emerging currencies, including the Real. The Brazilian currency regained important ground on Tuesday, this was on the eve of Brazil's Central Bank monetary policy decision that announces the new Selic rate today, which is widely expected to come in a new increase of 1.5% basis points. The new increase will take the base interest rate to 9.25% per year. Although the tightening cycle aims to tame inflation, the prescription of this monetary policy should advance the economy even further in recession territory. In addition to the new Selic, investors will receive updates on retail sales for October, which is anticipated to worsen from -5.5% to -6.2% annually. 


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