Daily Market Pulse

Dollar holds firm ahead of key jobs data

6 minute read


As investors await U.S. jobs data, which are anticipated to stay strong in June, supporting the argument for another massive rate hike from the Federal Reserve, the U.S. dollar index held firmly on Friday, inching closer to a fresh 20-year high after closing at 0.07% higher yesterday. Meanwhile, the American economy probably added 268K payrolls in June 2022, down from 390K in May. This would be the lowest reading since April 2021. The unemployment rate is projected to remain constant at 3.6%, the lowest level since February 2020, while wage growth is predicted to have stabilized at 0.3%. Finally, U.S. equities rose for the fourth straight session on Thursday, before the futures pointed lower this morning signaling a cautious market mood.


The euro is moving downward this morning after declining 0.22% yesterday as concerns about a recession increased from Russia cutting off gas supplies. As a result, the common currency is now nearly at parity with the dollar and is at its lowest point in 20 years. Investors worry that Russia would stop supplying gas to Europe, causing a recession that would make it more challenging for the European Central Bank to tighten monetary policy. According to the most recent ECB minutes, policymakers discussed raising rates by 25 basis points this month and possibly by a greater amount in September, with succeeding months seeing a gradual tightening. In recent weeks, however, as inflation reached a new record high of 8.6% and gas prices continued to rise, markets have lowered expectations of ECB rate hikes this year by 30 basis points to 135 basis points.


The British pound strengthened as Prime Minister Boris Johnson resigned, after several cabinet members quit, meaning the UK is on course to have its fourth leader within six years. Given that it might take several weeks to elect a new leader, the political unrest in the UK exacerbates the uncertainties surrounding the nation's economic prospects. Nevertheless, hope grew that the new administration would quickly lower taxes, raise expenditure to spur economic growth, and enhance relations with the EU. Since May 2021, the pound has been steadily declining to historic lows as investors worry about the possibility of a recession and question the BoE's ability to rein in inflation without seriously harming the economy. The central bank already raised interest rates by 115 percentage points but the inflation shows no signs of peaking and households will probably become more stretched in the coming months.


Following the shooting of former Prime Minister Shinzo Abe, the Japanese currency increased by over 0.5% on Friday, in what appears to be safe-haven buying. The creator of the Abenomics brand of reforms, who is still revered inside the ruling Liberal Democratic Party, was shot while giving a speech in the western city of Nara and was brought to the hospital. The yen is still hovering around its lowest level in 24 years, and Japan's monetary policy is very different from that of other major nations. At a time when other major countries are hurriedly raising interest rates to tackle rising inflation, the Bank of Japan is still the only major central bank that has kept its ultra-easy policies in place. At its June meeting, the BOJ kept its key interest rates steady and committed to upholding an implied yield cap of 0.25% on the 10-year Japanese government bond. 


The previous session saw the Canadian dollar end 0.57% higher before losing steam this morning as market sentiment dwindled. According to the most recent data release, the Canadian Ivey Purchasing Managers Index decreased from 72 in May 2022 to 62.2 in June 2022. It was the lowest reading since February as supplier delivery times increased and stockpiles decreased. In the meantime, the rate of job growth remained constant, and pricing pressures eased for a second month. Additionally, a recovery in commodities helped the Loonie by increasing shares of oil & gas and materials by more than 2%. Other than that, Canada's trade surplus increased to CAD 5.3 billion in May 2022 from an upwardly revised 2.2 billion in the previous month and was significantly more than the CAD 2.4 billion market consensus. In light of increasing exports, it was the highest monthly trade surplus since August 2008.


The Mexican peso lost some of its gains this morning amid the risk-off market atmosphere despite closing yesterday with gains of 0.68%. According to the most recent domestic data releases, Mexico's annual inflation rate increased to 7.99% in June 2022 from 7.65% the previous month, the highest level since 2001 and slightly higher than the 7.95% consensus. Banxico has a compelling justification for continuing its rate-hike binge due to the intense price pressure. According to various reports, Mexico's vehicle exports increased by 1.4% in June 2022 compared to the same month the previous year, reaching 237,674 units. Mexican auto exports increased for the fourth month in a row.


The Chinese yuan closed 0.17% higher in the previous session against the greenback. On Friday, the yuan lost some of its small early gains against the dollar as a result of a rise in risk aversion following the news that Japan's former prime leader Shinzo Abe had been shot. After Abe was shot on Friday while running for office in the city of Nara, currency traders reported that safe-haven demand for the Japanese yen and the dollar increased. Concerns that internal Covid flare-ups might thwart China's economic recovery, despite attempts to spur growth, caused the Shanghai Composite to drop 0.25% and the Shenzhen Component to drop 0.61% on Friday.


With the vote on PEC postponed to next Tuesday, Real found room for a slight correction, amidst the ease in the strength of the dollar in the international market. Yesterday, Real closed 1.15% higher against the greenback. Domestically, although approved by the Chamber’s special committee of Deputies, the government was unable to mobilize its base and had to postpone the vote on the PEC in the plenary to avoid the risk of defeat. Coming up, traders will see the latest IPCA data released by the National Agency for Statistics (IBGE) that is expected to increase by 0.71% in June in the monthly comparison, compared to an increase of 0.47% in the previous reading. On an annual basis, the index likely rose 11.94%.


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