Daily Market Pulse

Dollar consolidates its gains


The dollar is consolidating its gains early Wednesday after declining 0.19% yesterday as investors remain on the sidelines anticipating further developments in the Russia-Ukraine conflict. Markets remain cautious, but safe-haven assets struggle to maintain their gains in the middle of the week. The protracted conflict in Ukraine, as well as the accompanying sanctions, showed no signs of abating and continued to cause market disruption around the world. A spike in commodity prices has resulted, fueling inflationary and growth concerns while posing new challenges to central banks around the world. Meanwhile, the Federal Reserve is expected to hike interest rates by 25 basis points at its meeting in March, but Fed head Jerome Powell has hinted that the central bank could act more aggressively if strong inflation persists. Investors are now looking forward to the release of the U.S. inflation report on Thursday, which is projected to show yet another multi-decade high of 7.9% in February this year.


The Euro closed 0.41% higher on Tuesday before extending its gains on Wednesday morning. The Euro gained ground and recovered from its lowest level since May 2020 earlier in the week after the news that the European Union is considering jointly issuing bonds to pay energy and defense spending in the wake of Russia's invasion of Ukraine, which occurred earlier in the week. Following an emergency conference in Versailles, the European Union is set to reveal a proposal this week. The combined fundraising effort would be the second pan-EU spending plan, following the NextGeneration EU package, to help restore the harm caused by the COVID-19 pandemic, according to the European Commission. Meanwhile, the European Central Bank (ECB) will announce its monetary policy decision as well as the release of its newest macroeconomic projections on Thursday, with markets anticipating no change in borrowing prices despite record-high inflation, owing to the current geopolitical risk.


The Pound Sterling closed at marginally lower in the last session, however, it regained its momentum as the dollar stabilized this morning. This occurred as investors navigated between the news of surging commodity prices and the ongoing conflict in Ukraine, which occurred during the period. New measures on Russia have also been issued by the United Kingdom, including a ban on all Russian aircraft from overflying the country and the seizure of any plane that lands in the country. On the war front, Russian forces increased the intensity of their bombardment of Kyiv, despite the Kremlin's approval of humanitarian routes through the capital and other significant cities. In other news, the United Kingdom said that it will cut down its reliance on Russian oil by the end of 2022. The decision came after Prime Minister Boris Johnson announced that the government will develop a new energy supply strategy to lessen the country's reliance on Russia in response to Moscow's escalating aggression against Ukraine. Moving forward, geopolitical headlines will continue to influence Sterling prices.


The Japanese Yen closed 0.30% lower in the previous session against the greenback. Following central bank chief Haruhiko Kuroda's announcement this week that the possibility of tightening monetary policy to deal with any commodity-driven rise in inflation is remote, the Japanese Yen weakened against the U.S. dollar on Wednesday. Kuroda also stressed the importance of waiting for wage growth to pick up before tightening monetary policy. Also, the Bank of Japan has declared on numerous occasions that it will maintain ultra-loose monetary policies to promote the economic recovery and meet its 2% inflation objective, indicating that it has taken one of the most dovish postures among the world's major central banks. Demand for the Yen as a safe haven decreased as traders reevaluated the dangers associated with the conflict in Ukraine. In other news, the Nikkei 225 Index fell 0.3%, while the broader Topix Index fell 0.06% on Wednesday, as Japanese stocks reversed early gains and sank further into multi-month lows, while the war in Ukraine and its economic ramifications continued to weigh on investor confidence.


The Loonie closed 0.51% lower in the previous session before recovering its losses this morning. Although oil prices have increased, the Canadian dollar has continued to drop versus the U.S. dollar in the second week of March, reaching its lowest level in 11 weeks as fears about slower growth and rising costs continue to weigh on risk-sensitive currencies. As a result of the United States' decision to impose an embargo on Russian oil, gas, and energy imports, crude oil prices continued to rise. Meanwhile, despite recent rate hikes by the Bank of Canada, the supply shock of fossil fuels and commodities caused by Russia's invasion has heightened inflation fears in Canada. In its March meeting, the central bank raised its objective for the overnight rate by 25 basis points to 0.5%, marking the first increase since October 2018. The bank also stated that it will use its monetary policy tools to bring inflation back to the 2% target.


The Mexican Peso plunged 0.29% in the last session before reversing its losses on Wednesday morning. The Mexican peso took a deep breath after plummeting by more than 1% in the previous day as the investors preferred to sit on the sidelines and await further developments in the Ukraine-Russia conflict. Meanwhile, In February of 2022, consumer confidence in Mexico fell to a five-month low of 43.4, remaining unchanged from the previous month's reading. Elsewhere, Mexican President Andres Manuel Lopez Obrador has stated that he will take advantage of increased international oil prices to offset the expense of gasoline imports, it is possible that his goal of drastically reducing crude exports may prevent him from implementing this vow.


The Chinese Yuan closed 0.04% lower in the previous session against the greenback. The Yuan maintained steady against the U.S. dollar on Wednesday, lingering around four-year highs as the currency's resilience in the face of geopolitical uncertainty in Ukraine fueled demand for safe-haven assets in the global financial markets. In recent years, the Yuan has benefited from large foreign currency receipt holdings by onshore enterprises as a result of a trade surplus position, making it largely resistant to external risk aversion. Even after the People's Bank of China recently relaxed monetary policy and announced further easing measures in the coming months, the Yuan maintained its strength against the dollar. Elsewhere, the Shanghai Composite Index fell 1.13%, while the Shenzhen Component Index fell 1.12%, in what analysts attributed to a variety of factors including fears of sanctions against Chinese firms with Russian ties, an increase in coronavirus cases, higher-than-expected producer prices, and volatility caused by algorithmic trading on the Chinese mainland, among others.


The Brazilian Real closed 0.44% higher on Tuesday against the greenback. The Real resumed operation with only a slight gain, as investors in the market assessed the likelihood of the federal government implementing measures to regulate the price of gasoline. Such steps are not yet apparent, but the administration undoubtedly finds itself in a difficult position between the risk of losing popularity on the eve of the presidential elections and the fiscal federal budget uncertainty that big investors are experiencing. Meanwhile, the country's attention is focused on the conflict in Ukraine and the measures taken by world leaders to mitigate the harmful consequences of such events. The most important driver in the domestic agenda is the fuel price discussions, which is currently underway. The government will continue to analyze the implications of any policy changes on the financial market and the economy.


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