Daily Market Pulse

The Dollar rises as geopolitical tensions loom


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, suffered 0.49% during Wednesday’s closing session, touching the weekly lows amid cautious optimism. However, this was followed by a modest bounceback on early Thursday, which helped to erase yesterday's losses as market sentiment flips after Omicron headlines flagging that this variant is 4 times more infectious than Delta spooking market participants. Inflation expectations propels sooner Fed hike anticipations and rise in U.S. Treasury yields, which in turn keeps the U.S. dollar holding onto the defensive ground. Meanwhile, a strong print of October’s job openings, which stands at 11.03 million against expectations of 10.48 million, provides a catalyst for U.S. Treasury yields, which followed a hike of 1.7 basis points for the day. On the other side, geopolitical tensions over Iran, China, and Russia loom while the U.S. and Russia remain conflicted over the Ukraine issue, and both issues have weighed down on the currency. Looking forward, market participants will get the U.S. jobs data print today and virus-related headlines to drive the markets before the vital release of the U.S. Consumer Price Index on Friday. 


The Euro surged 0.67% against the dollar towards the end of Wednesday’s session, touching weekly highs followed by trading at tepid gains/losses near the  weekly high region during the opening hours of the European trading session. The Euro jumped the most in two weeks yesterday amid firmer market sentiments and on the backdrop of the U.S. dollar. This is mainly linked to the easing concerns over the new South African virus Omicron. On the other side, market sentiment was tempered by a spark in new cases in Europe, which called for a lockdown in France, Germany and the UK. Additionally, the U.S.-China tussles, talks over Iran diplomacy and the Fed’s calls for a sooner rate hike adds further pressure to the Euro. Moving ahead, traders will be looking out for German trade figures and U.S. jobless claims data to give direction to the market.


The Sterling declined 0.30% against the greenback during Wednesday’s closing. The Sterling struggled to keep a hold of overnight goodish bounce from the yearly lows, and oscillated in a narrow band below the high levels during the early trading hours of Thursday. However, the imposition of stricter COVID-19 rules in England weakened the British Pound. Aside from that, a slight increase in U.S. dollar demand precluded any substantial rise for the pound. This follows the UK-EU standoff over the Northern Ireland Protocol, which appears to have shattered prospects for the Bank of England’s interest rate hike at its meeting next week. The U.S. dollar, on the other hand, continued to benefit from rising market confidence that the Fed would tighten monetary policy sooner rather than later in order to contain stubbornly high inflation. In the absence of major market-moving economic releases from either the UK or the U.S., the U.S. dollar pricing dynamics will continue to impact Sterling later in the day. 


The Japanese Yen declined 0.06% against the U.S. dollar on Wednesday’s closing session, marking the second consecutive session of it closing lower against the greenback. A couple of factors limited the further downside for the Yen during the early trading hours of Thursday. Despite diminishing concerns about the economic consequences of the new Omicron variant, growing geopolitical tensions held the recent optimism at bay and kept a lid on any upside movement for the U.S. dollar. Similarly, the weaker tone in equity markets benefited the safe-haven Japanese Yen while acting as a headwind for the major. Meanwhile, Investors became cautious after U.S. President Joe Biden warned that it would impose harsher economic and other sanctions on Russia, if it invaded Ukraine. However, the downside for the U.S. dollar is limited due to an anticipation of an aggressive Fed policy and sooner than earlier rate hike expectations. Looking forward, traders will take hints from broader market sentiments to provide a directional move for the Yen. 


The Loonie declined by 0.12% against the greenback on Wednesday’s closing. The Loonie pair surged to its highest levels since November 19th before declining in yesterday’s closing session. This comes after the Bank of Canada (BOC) matched wider market expectations by maintaining the benchmark interest rate at 0.25%, signalling inflation could persist for longer than expected. Additionally, the Loonie faced the heat of increasing U.S. dollar demand amid easing concerns of Omicron and the Fed’s aggressive rate hike expectations. Although the Bank of Canada reiterated its bullish approach, it could not tame the U.S. dollar’s strength. Meanwhile, the WTI crude oil prices rose for the fourth consecutive day, but it cannot contain bulls eyeing the U.S. dollar amid the geopolitical tension between the US, China, and Russia. Traders are waiting for comments from BoC Deputy governor Toni Gravelle as well as U.S. jobless claims to move forward before the U.S. CPI release on Friday. 


The Mexican Peso rose 0.48% against the dollar during Wednesday’s closing, recording its third consecutive day of posting gains against the greenback. A mixed market sentiment favours risk-sensitive currencies like the Peso against the detriment of the U.S. dollar. This is indicated as the Europe equity index ended the previous day in negative territory, and the Dow Jones index plunged 0.15% down in the day.  Meanwhile, positive news regarding the Omicron variant improves the market sentiment as lab experiments show that the third dose of Pfizer neutralises the virus. Moving forward, in the absence of any economic data release from either the U.S. or Mexico, traders will use market sentiments to give further direction to the Peso.


The Chinese Yuan edged 0.35% higher against the U.S. dollar at the closing of Wednesday’s session. The offshore Yuan continues advancing higher for the third consecutive day versus the greenback. Meanwhile, in the economic data release, Food prices in China increased by 1.6% year on year in November 2021, after falling by 2.4% in the previous month. This was the first increase in food prices noted in the past six months. In November 2021, China's banks issued CNY 1.27 trillion in new Yuan loans, up from CNY 0.83 trillion the previous month, but fell short of market estimates of CNY 1.56 trillion, as the central bank attempted to boost sluggish economic development. On Thursday, the Shanghai Composite Index rose 0.98%, while the Shenzhen Component Index rose 1.23%, extending the previous day's surge as robust investor demand for mainland equities was released by reducing trade tensions. This comes after the People’s Bank of China cut the reserve requirement ratio(RRR) earlier this week, freeing up 1.2 trillion yuan in long-term liquidity meant to bolster slowing economic growth. 


Once again, the Brazilian Real jumped 1.42% against the U.S. dollar on the previous day’s closing. The Real went through two consecutive correction sessions. Although the macroeconomic components remain negative (E.g. retail sales showed a drop of -7.1% in October year-over-year), investors now envision “carry trade” opportunities offered by the currency. The Central Bank decided to raise the Selic interest rate at 1.5% basis points, from 7.75% to 9.25% p.a., adopting a conservative tone as the BC clearly expressed the need for caution in the face of greater persistence in inflation. This comes as they foresee another adjustment of the same magnitude at the next meeting in February. Additionally, higher interest rates increase the profitability of the domestic fixed income market, which would tend to attract more foreign capital to the country, increasing demand for the Brazilian currency. Meanwhile, the government and Congress finally reached an agreement to enact a part of the PEC of Precatórios. Parts of the PEC that were approved by both the Chamber and the Senate became public yesterday afternoon, guaranteeing a space of R$64.882 billion in the 2022 budget. 


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