The greenback remained subdued against most of its peers during Monday session as the US Dollar index retraced 0.95% amid a slight pickup in risk sentiment in global markets. Stock indexes recorded gains while the dollar extends its retracement to the lowest levels in almost 2 weeks. As the mid-term election race continues Republicans are on the hunt for 5 more seats to gain majority in the house and one seat to control the senate. The outcome is likely to be extended throughout the course of the week which will keep market participants wary of which party will be controlling both chambers. Uncertainty around the final results keep stock markets flats today and treasury yields remain steady slightly above 4%. Later today, the US economic docket will feature NFIB Business optimism index for October and IBD/TIPP Economic optimism for November to gauge market risk appetite.
The common currency capitalized 0.92% against the dollar off the back of the broader dollar weakness on Monday session and it is testing the parity resistance. European policymakers took the stance yesterday with remarks from Martin Kazaks noting that the ECB will continue raising rates and highlighting that nobody at the moment can know with any precision where exactly the terminal rate will be. Additionally, Christine Lagarde said on an interview “What we have to do at the moment is difficult” and reiterated the ECB’s commitment to bring inflation back to 2% in the medium term. The spokeswoman recognized that inflation in the euro area is high and that expectations remain anchored while interest rates increase.
The British pound managed to recover 1.55% on the first session of the week, taking advantage of a softer tone around the dollar. Bank of England Chief economic Huw Pill said market turmoil in the UK in recent weeks led to some “de-anchoring” of inflation expectations and policymakers are working on towards tamp down those views. Although the spokesman underscored the BOEs concerns around Liz Truss policies, policymakers have “more to digest” about how Sunak’s fiscal policy will impact the economy and they will take a close look at the budget expected to be announced on the 17th of November. Moreover, the UK labor market lost about 600k workers since the pandemic and that has kept the market tight despite the weakening of the economy.
The Japanese Yen had a modest performance on Monday session, recovering a shy 0.14% against the greenback despite its softer demand. Japan has been one the world’s biggest buyers of U.S. treasury bonds for years which has helped to hold down borrowing costs in the US. However, the landscape is now changing and there are sign that Japan’s government is selling short-term U.S. bonds as part of its effort to prop up its currency. Simultaneously, institutional investors are racing to reduce their foreign bondholding offloading Treasuries. The shift is another example of inflation and rates altering investors long-held assumptions. The Federal Reserve’s interest rate increase has weakened the Yen and made it costlier for Japanese investors to hedge against currency when buying U.S. assets. As a result, a lower demand from Japanese investors increase concerns about a potential destabilizing shift in global capital flows.
The Loonie little moved on Monday after gaining 1.94% against its US counterpart on Friday. A drop in oil prices and downbeat headlines from China weighed on the CAD - signals from China that there will no relaxation of its Covid zero policy after cases hit a six-month high. This morning, WTI and Brent crudes extend their losses. Today, market participants will continue to assess US inflation figures expected to be published later in the week, after the consumer price index rose more than forecast to a 40-year high in September.
The Mexican Peso extended gains (+0,31%) on Monday after gaining 0.63% against the US dollar on Friday. The major driver for the currency continues to be expectative that Mexico’s Central Bank raises rates 75bps on Thursday. This should help keep the MXN among the over-performing currencies across LATAM. Furthermore, the MXN is also supported by the increased exchange rate flows that come from exports, remittances, and foreign direct investment. Looking ahead, the MXN behavior for the next few days will be also determined on the back of the inflation in the US, which will be released on Thursday. This should also provide further support for the Peso if confirmed another inflation increase in the US.
The CNY continues to trade around China’s reopening narrative. Even though there are speculations that the government will reduce the quarantine requirements in Beijing to a total of 7 days from the current ‘7+3’ mode, recently the top officials reconfirmed their commitment to its zero-Covid policy. On that note, this month, the G20 summit is the first global leaders’ event President Xi will attend in person since Covid. There is still no confirmation of a meeting between Presidents Xi and Biden, but the event itself may see China offer “reopening” concessions to foreign business travelers and ex-pats. While market players wait for more concrete information, the Chinese yuan might continue to trade toward a weaker level.
The Brazilian real kicked off the week on the wrong foot, dropping more than 2% against the USD, following China's commitment to its zero-Covid policy. This strict policy impacts China’s economic growth, which is one of the main buyers of commodities and other diverse types of products in the world. Market participants closely monitor who will be the new Finance Minister, as former central bank president Henrique Meirelles said he’s not a candidate to become finance minister in Lula’s government. Former Sao Paulo mayor Fernando Haddad has been quoted as finance minister, if confirmed, we might expect increased FX volatility.