Daily Market Pulse

Investors remain cautious ahead of critical U.S. inflation figures


The U.S. dollar index, a coefficient used to benchmark the performance of the greenback against a basket of six major currencies, advanced 0.1% as market participants remain cautious ahead of critical U.S. inflation figures. However, sentiment remains mixed, amid concerns from China’s tech slash, oil supply jitters due to the impact of Hurricane Nicholas, and hopes about the economic recovery. The U.S. inflation reports are due later today in the U.S., which will keep traders tuned. Consumer Price index figures expected to post 5.3% annualized on its headline readings, while core figures are expected at 4.2% annualized. Expectations suggest a small decline from its previous reading, although it is still high and well above its target. Federal Reserve Chair, Jerome Powell, keeps insisting that current inflationary levels are transitory and that they are expected to ease as supply chain bottlenecks ease, however persistent reading backs fears that inflation has risen. Market participants feel tension as inflation figures will feed into the Fed’s September decision coming up next week. Moreover, Crude oil prices are on the rise, with prices around USD 71 per barrel as Hurricane Nicholas threatens oil output in the Gulf of Mexico while it makes its way through.   


The common currency bounced back from monthly lows, and it currently sustains gains ahead of key U.S. inflation data. Uncertainty and cautiousness keep currency pairs with shy moves reflecting market indecision. Additionally, Isabel Schnabel, Executive Board Member of the European Central Bank, said yesterday that inflation will noticeably decrease as soon as next year. The statement should have ideally helped the common currency to capitalize gains against the dollar, although they were overshadowed by Federal Reserve tapering expectations and the upcoming inflation figures. However, optimism stays warm in the old continent as Covid-19 cases continue falling, while policymakers seem comfortable with higher inflation, following the “trim” on stimulus from last week.


The British Pound remains firm against the dollar following the release of Claimant Count figures together with Unemployment Rate in the three months to July during early hours of today’s trading session. The U.K.’s Office of National Statistics posted Claimant Count Change at -58.6k vs -71.7k expected, although August results remain better than July’s -7.8k. Moreover, Unemployment met expectations at 4.6% in the three months to July, decreasing 0.1% from its previous release. Additionally, Earnings including Bonus grew 8.3%, exceeding expectations from 8.2%, suggesting that consumers will have enough cash to spend in the upcoming season. The Job reports support the BoE hawks and underpinned cable ahead of critical U.S. inflation data, which will provide policymakers with input for their monetary policy meeting coming up next week. However, detailed inflation reports from the U.K. are due tomorrow which will provide further input to define the direction of the pair. 


The Japanese Yen remained underpressured ahead of critical U.S. inflation figures which are expected to surprise on the upside. However, the Yen failed to capitalize from falling U.S. treasury yields, which have been in demand due to latent risks and concerns from China and Hurricane Nicholas. Moreover, Japanese morale improved following the announcement from Taro Kono and his candidature to lead the ruling Liberal Democratic Party (LDP) in the upcoming elections. On a side note, an earthquake of magnitude 6.1 was felt in Japan with no tsunami warning.   


The Canadian Dollar takes a pause after recording the worst performing session in eight days, while oil prices remain firm and Fed tapering chatter ahead of U.S. inflation reports keep the loonie on check. Hurricane Ida, typhoon Chanthu and tropical storm Nicholas could be held responsible for propelling the oil prices towards USD 71 per barrel mark. Additionally, China’s recent assertive behaviour with global leaders clear the way for supply crunch and demand improvement respectively, renewing market optimism. However, cautiousness keeps the Loonie’s potential in check, ahead of the all-important U.S. consumer price index figures coming up later today.  


The Mexican Peso continues to pressure the greenback, testing a key resistance level amid higher inflation in the country in combination with tapering expectations and U.S. inflation reports coming up later today. Mexico’s Social Security Institute reported that 129k formal jobs were created in August this year, growing 0.6% in July and 4.2% annualized. The report shows that the transport and communications sector have the greatest annual increase in jobs creation (9.3%), although total formal jobs are still below pre-pandemic levels. 


The Chinese Renminbi erased losses from Monday’s trading session, testing a 4 month high against the dollar. Market participants reportedly commented that several Chinese banks have too much dollar liquidity, although these institutions don’t have enough channels to invest or deploy this liquidity. This has urged the banks to swap these dollars for Yuan. The excess in dollars, in addition to the swap trades, have adjusted the swap curve and its funding costs, recording the highest close in six years. China’s onshore USD liquidity remains high in addition to the large trade surplus and cross-border travel hasn’t resumed. These conditions have made onshore banks absorb excess USD liquidity from the private sector. 


The Brazilian Real advanced 0.59% during yesterday's trading session amid a change in focus back to the fiscal deficit and social programmes. The political debate is back to the BRL 90 billion in court ordered payment that blocked a boost in social programmes, in addition to creating serious concerns for investors on the funding of these government initiatives. As part of the broader political turmoil, market participants remain skeptical over a truce between President Bolsonaro and Supreme Court, although relative quietness from each counterpart keeps the mood calm. Moreover, expectations that the Brazil’s Central Bank will accelerate its tightening cycle this month have implied odds of 70% on digital options being the preferred bet at a hike of 125 bps with 41% chance.   


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