The U.S. dollar index, a coefficient used to measure the valuation of the greenback against a basket of six major currencies, remained firm against most of its peers on the back of sustained treasury yields attempting to consolidate higher. The constructive market sentiment keeps the equity market on the front foot, with S&P 500 hitting new all-time highs on Monday and risk flows dominating financial markets. The U.S. Treasury yields attempted to break the 1.7%, gaining 1% during the day on Monday, although failing to consolidate and closing flat around 1.65% and sustaining the highest levels since Q2-21. On the other hand, COVID-19 cases are on the rise again. China warned that the latest coronavirus outbreak is likely to spread further and Russia reported record-high readings on Monday, spooking market participants to remain cautious ahead of this week’s high-impact events aiding the dollar to hold its ground. Today New Home Sales and CB Consumer Confidence Index data from the U.S. are expected on a positive note.
The common currency fell 0.24% against the greenback during the Monday trading session amid disappointing data from Germany flagging low morale indicators in the Bloc. The German IFO reports, which provide relevant input for market participants to gauge market sentiment and morale, failed to impress with “Business Climate” and “Expectations” missing expectations forecasting difficult months ahead, while “Current Assessment” was the strongest reading in the reports outperforming previously anticipated results. Additionally, the Bundesbank monthly report showed that the full-year growth in 2021 is likely to be significantly lower than the June forecast of 3.7%. Coming up, investors await ECB Bank; lending Survey and German GfK Consumer Confidence.
The Pound Sterling struggles to gain traction, failing to extend Monday’s rebound ahead of Brexit talks taking place today in London, which keeps the mood cautious. The U.K. Brexit Minister David Frost conveyed his dissatisfaction with the latest Brexit talks and the European Union's fresh proposal to overcome the Northern Ireland border issue to a parliamentary committee. The spokesman flagged that the European Union's proposals don’t go far enough and a December deadline has been set for the two sides to find a solution. Moreover, the U.K. has witnessed a significant rise in Covid cases reporting close to 40k new daily cases for the last four days. The U.K health secretary has warned people not to let their guard down as there could be 100k Covid cases per day as the country heads into the winter season.
The Japanese Yen remained subdued against the dollar amid a broader risk-friendly environment weighing over the safe-haven appeal of the Asian currency and higher U.S. treasury yields sustaining significant pressure. The U.S. Treasury yields attempted to break 1.7% levels, although the move lost momentum amid comments from the U.S. Treasury Secretary Janet Yellen on inflation where she expected U.S. inflation to return to normal by the second half of 2022, pulling back yields to 1.65% where it currently trades. Later on the day, Japanese Retail Trade readings are set to be released, where market participants anticipate a 2.3% contraction in annualized terms from August.
The Canadian dollar consolidates gains against the dollar amid a pullback in Treasury yields and crude oil prices retreating from a seven-year high. The West Texas Intermediate retraced from its multi-year high which pushed the Loonie lower against the greenback, changing hands at USD 84 per barrel during the early hours of Tuesday trading session and ahead of tomorrow’s U.S. crude inventories. In addition to that, hawkish expectations around the upcoming Bank of Canada (BoC) monetary policy meeting have moved expectations of interest rate hikes as early as Q3 2022, three months earlier than previously anticipated.
The Mexican Peso remained relatively unchanged against the dollar during yesterday's trading session amid broader dollar strength, risk appetite, and inflation reading in the country. Mexican authorities released inflation reports revealing that the Consumer Price Index rose 0.54% in the first two weeks of October, pushing headline annualised inflation to 6.12%. The sustained inflation raised concern among market participants as Banxico hiked its benchmark rate last month by 25 bps to 4.75%, following increases of the same amount in previous months, raising the question of whether further hikes are on the pipeline.
The Chinese Yuan holds its ground against the greenback despite the recent attempt of U.S treasury yields to continue edging higher. The market mood remains positive as investors cheer for the positive developments in the China-U.S. relationship and talks between China’s vice-premier Liu He and U.S. Treasury Secretary Janet Yellen, as they discussed bilateral relations and the macroeconomic situation. Moreover, market participants closely follow Chinese authorities' approach toward market regulation, as recent developments suggest that China may be shifting its focus away from tighter monitoring of sectors and focus on bolstering growth in the country.
The Brazilian Real remained firm against the greenback, closing Monday’s session 1.73% higher amid government plans to revise fiscal rules. The Economy Minister Paulo Guedes highlighted the government’s intentions to bypass the constitutionally-mandated spending cap to fund the new social programme “Auxilio brasil”, while adding that the approval of structural economic reform currently stuck in congress. The news to raise the spending ceiling comes while the country suffers from significant inflationary pressures and Brazilian Policymakers prepare to hike interest rates between 100-150 bps this week.