Daily Market Pulse

Softer dollar amid a quiet Monday and risk sentiment


The U.S. dollar index, a common tool used to assess the valuation of the greenback against a basket of six major currencies, continued to retrace amid a positive risk-on mood weighing on the U.S. currency at 0.18% during yesterday’s trading session. Driven by risk sentiment, Wall Street indexes finished the day higher, although futures have started to pull back amid expectations of monetary tightening and removal of stimulus. Additionally, St. Louis Federal Reserve President, James Bullard, said that he expects the Fed to hike interest rates twice in 2022. Moreover, U.S. President Joe Biden reportedly interviewed Lael Brainard for the next Fed Chair, triggering comments from Mr. Bullard that he expects a lot of continuity in the Fed’s policy no matter how the Fed Chair appointment process works out. Coming up, the ZEW sentiment survey for the Euro area and Germany will be an important release ahead of the U.S. Producer Price Index reading. Meanwhile, several policymakers are expected to speak during the day, including ECB President Lagarde, BoE Governor Bailey, and Fed Chairman Powell.  


The shared currency advanced 0.36% against the greenback amid a positive risk tone and a lack of macro drivers in the economic docket. In the spotlight of yesterday’s trading session, European Central Bank (ECB) chief economist Philip Lane reiterated that inflation dynamics in the medium term are still weak in the Eurozone, suggesting that Europeans should stick to its dovish policy in the medium term. However, there is a wide divide among the policymakers on how long the reflation fears can last and the need to address them with rate hikes, which seems unlikely in the Euro area. Today, ZEW reading in the Eurozone and Germany will provide useful insight to market participants on morale indicators and sentiment.  


The British Pound bounced back 0.56% against the greenback during yesterday’s trading session amid a softer dollar and Sterling benefitting from dip-buying. However, Brexit tensions continue to mount amid comments from Britain negotiator Lord David Frost emerging from a meeting with his European counterparts saying that advances towards new trading rules for Northern Ireland had been limited. The Brexit minister was echoed by Sir Jeffrey Donaldson, leader of the Democratic Unionist Party (DUP), reiterating his belief that conditions have been met to trigger Article 16. Moreover, the U.K Prime Minister Boris Johnson is pushing strongly for the COVID-19 booster jab, referring to it as the “single most important thing” people can do for the country to help protect the National Health System (NHS).  


The Japanese Yen continues to advance at a steady pace against the greenback, looking to record its fourth consecutive session registering gains. The recently announced stimulus in Japan acts as an important driver for the pace of the JPY, as Japan’s ruling party Liberal Democratic Party and coalition partner Komeito agreed to offer JPY 50,000 (USD 441) worth of vouchers to children aged 18 or younger as part of the government stimulus package. Moreover, U.S. treasury yields keep struggling to find traction, suggesting cautious optimism supporting the move from the Yen. Nonetheless, the ECO watches survey for October released positive results on both the outlook and current situation, beating previous readings during the early hours of today’s trading session. 


The Canadian Dollar traded sideways against the greenback amid cautious optimism in global markets and lack of data drivers in the economic calendar. We expect the pair to stay focused on general market sentiment and the dynamics in commodity markets. The West Texas Intermediate is edging higher, looking to consolidate above USD 82.5 dollars, underpinning front steps for the Loonie. Later today, Bank of Canada Governor Macklem will release his speech, as the main event of the session for the Canadian dollar. 


The Mexican Peso continues to step firm against the U.S. dollar, amid a divergence from policymakers on the approach for the monetary policy, as Fed officials refrain from adjusting interest rates. On the other hand, Banxico is expected to raise another 25 bps on Thursday this week. Additionally, the U.S. - Mexico border reopened after almost two years of the COVID-19 shutdown. However, there were fewer crossings at the border than expected on Monday as it reopened non-essential travel following 20 months of closure due to the impact of the pandemic.


The Chinese Yuan remains trading within a tight range amid interventions from policymakers injecting liquidity to distressed financial conditions. Additionally, the People’s Bank of China will offer cheap loans to banks to fund firms that are working towards the nation’s goal of reducing carbon emissions. The PBoC will lend financial institutions 60% of the required funds at an interest rate of 1.75%, and banks can then mark up their loan at the loan prime rate. Today, we don’t expect any macroeconomic releases from China, although tomorrow, market participants will closely follow the release of the Producer Price Index, Consumer Price Index, and Foreign Direct Investments.  


The Brazilian real sustained solid footing against the greenback amid a broader dollar weakness driven by weaker U.S. treasury yields. The Brazilian Real was among the best-performing currencies last week, not due to optimism over the Brazilian economy, but because investors considered it oversold, pushing for a short-term correction. Moreover, following the government’s efforts to pass a bill that will change spending cap rules and impose a limit on how many court-ordered payments can be made in a single year, the Supreme court requested to the lower house President Arthur Lira details on the mechanism used to vote on the bill last week, adding another layer of debate and controversy. On this note, today, the market’s attention should continue to be on the Secret Budget (rapporteur's amendments) of R$19 billion, an instrument used by the government to 'encourage' deputies and senators to vote in favor of the PEC dos Precatório. On this 'Super Tuesday', as defined by the local media, the Supreme Court's virtual plenary will be receiving votes to confirm or reject the Minister's preliminary decision. The analysis of the case will begin this Tuesday morning, in a session of the STF's virtual plenary, and the ministers will have until 23:59 on Wednesday this week to deposit their votes in the electronic system.


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