Daily Market Pulse

Dollar pressurized amid midterms

6 minute read


As investors keep a close eye on ongoing U.S. Midterm Elections, the market mood turns cautious in the early trading hours of the European session on Wednesday. The U.S. dollar Index recovers modestly Following Tuesday's sharp decline (0.44%).   Latest polls showed that Republicans are likely to take back the House and possibly the Senate, placing a check on the Democratic policy agenda. Investors are also looking ahead to a key U.S. CPI report on Thursday, hoping it will confirm the downward trend in inflation since July and ease pressure on the Fed to continue tightening aggressively. Markets are currently priced for a more moderate half-percentage point Fed rate hike next month, but a hotter-than-anticipated inflation report could fuel bets for another supersized 75 basis point increase.


The Euro maintained its bullish momentum on Tuesday, closing the third consecutive trading day (0.54% higher) in positive territory before losing steam this morning. On Tuesday, European Central Bank (ECB) policymaker Joachim Nagel stated that large rate hikes are still required for the eurozone, and ECB Vice Vice President Luis de Guindos stated that quantitative tightening would begin "sooner or later," assisting the Euro to maintain its position against the U.S. dollar. In other news, Eurozone retail sales increased by 0.4% from a month earlier in September 2022, as markets predicted, following three months of unchanged or lower trade, as consumers remained cautious amid rising borrowing costs, stubbornly high inflation, and a deepening energy crisis across Europe.


The British Pound gained 0.26% on Tuesday as a result of widespread selling pressure on the U.S. Dollar. The Sterling, on the other hand, lost traction and fell early Wednesday. Amid a lack of economic data, investors' attention was drawn to the U.S. midterm elections, which will determine a shift in power in Washington, with a slip government seen as the best outcome for markets. Investors are also looking forward to U.S. inflation data due on Thursday, which could indicate how far the Federal Reserve is willing to tighten financial conditions in order to cool an overheating economy. Domestically, retail sales in the United Kingdom increased by 1.2% on a like-for-like basis in October 2022, slowing from September's 1.8% gain as consumers grappled with rising living costs.


Yesterday, the Japanese Yen extended moderate gains (+0.65%) against the greenback, with the pair receiving support from a remarkable rebound in terms of the Trade index that measures the relative performance of commodity export and import prices - the index is getting less negative since last August, which means the export prices has have outperformed import prices. Moreover, the country´s economy is not slowing as sharply (GDP Q3 +0.9%) as most global economies. Looking forward, the current JPY levels will be tested as market players assess U.S. inflation data tomorrow - inflation data has an immediate impact on US yields, which in turn has a negative correlation with the Japanese currency.


The Canadian dollar picked up 0.5% against the dollar despite investors´ caution due to the U.S. midterm elections, along with softer oil prices - the WTI Crude oil dropped 3.14% to $88.91/barrel. The energy benchmark price is under pressure as concerns over China´s demand due to speculation around the country´s covid policy. Looking ahead, investors and traders will continue to monitor U.S. CPI for October tomorrow, and a speech from the Bank of Canada Governor Tiff Macklem is also scheduled for tomorrow. The latter should get a lot of attention as the market is assessing if the BoC will ease rate hikes.


Yesterday, Mexico broke a streak of five consecutive sessions of gains against the dollar. The MXN closed 0.33% down. However, the peso remains close to its 2022 strongest value, last reached in early June. Major drivers this week include October CPI due today and the Central Bank (Banxico) rate decision tomorrow. On that note, the Mexican swaps fell yesterday, with the curve indicating the current tightening cycle will end in July/August next year. It´s expected that Banxico will move the interest rate to 10%, therefore a hike of 75 basis points - if confirmed, this will be the first time the reference rate will be double-digit since June 2001.


Even though there are a lot of rumors circulating about China´s anti-epidemic policy adjustments, the Chinese yuan closed flat on Tuesday. However, the currency has fluctuated substantially more in recent months. According to a Bloomberg report, its volatility not only ranks first among Asian currencies but also exceeds that of some developed countries countries´ currencies. The main market narrative for the currency is that the country´s capital market continues to receive foreign inflows and outflows, which is the major driver of the yuan price. Looking forward, market players will continue to monitor the developments around of Covid-zero policy, this might increase the hedging needs.


Yesterday, the Brazilian Real recovered some lost territory (+0.28%) against the USD. Investors were waiting for the outcomes of the U.S. midterm elections, as well as closely monitoring the government transition. On the latter, market players look favorably on André Lara Resende and Pérsio Arida, conservative economists who were among the architects of the Real Plan in the 1990s that implemented a new Brazilian currency and tamed hyperinflation. In economic data ahead, the country is expected to report a retail sales increase in September - from 1.6% to 1.7%.


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