Pound takes a beating, US Dollar gains ground

Reuters: Sterling takes a beating as it struggles to recover from a sharp fall on Thursday following UK inflation data that undershot market expectations, while the dollar regained its footing after a steep decline last week that analysts said was overblown.

U.S. DOLLAR GAINS, STERLING TAKES A BEATING

In Asia, markets also had their focus on China’s loan prime rate decision, where it is expected to keep the lending benchmarks unchanged after the central bank stood pat on a key policy rate earlier this week. The British pound was last 0.02% lower at $1.2936, after tumbling more than 0.7% on Wednesday in the wake of data that showed Britain’s high rate of inflation falling more than expected in June to its slowest in over a year at 7.9%. That pulled back market expectations of further aggressive rate hikes from the Bank of England, with the prospect of UK rates rising above 6% now likely off the table.

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Traders had at one point expected interest rates to rise as high as 6.5%. “The market I think is a bit more reasonable now with its expectations for rate hikes by the BoE. We always thought a 150 basis points of hikes was just too much,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia. Elsewhere, the euro rose 0.11% to $1.1213, as investors looked to next week’s European Central Bank policy meeting for further clarity on the rate outlook. ECB policymakers have in recent days taken a more dovish tone, with Governing Council member Yannis Stournaras the latest to guide that future rate rises past July’s likely 25 bp increase remains up in the air.

The U.S. dollar index steadied above 100 and last stood at 100.18, regaining some lost ground after last week’s more than 2% fall in a knee-jerk reaction to U.S. inflation data that came in cooler than expected. “We thought the fall was too strong, so it looks like the dollar has regained some of those losses,” said Capurso. “And with the global economic outlook deteriorating, that’s going to be very supportive for the safe haven U.S. dollar.” The Japanese yen rose 0.1% to 139.56 per dollar, while the Australian dollar was last 0.16% higher at $0.6782, ahead of the country’s employment data later on Thursday. The kiwi gained 0.06% to $0.6267, though retreated from the previous session’s high of $0.6315 hit after New Zealand’s consumer inflation came in slightly above expectations in the second quarter.

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Ahead of the LPR decision in China, the offshore yuan rose roughly 0.2% to 7.2184. Investors continue to be on the lookout for further support measures from Chinese authorities to shore up the country’s faltering post-COVID recovery, with data on Monday showing the economy grew at a feeble pace in the second quarter as demand weakened at home and abroad. “China’s growth has disappointed in the second quarter, but it’s very much on top of the agenda there that some stimulus will come,” said Mel Siew, a portfolio manager at Muzinich & Co. “It may not come as impactfully as people would like, but I think what will happen is you’ll see growth gradually resuming in China in the second half.”

BRITISH POUND

Reuters: Evidence that Britain’s red-hot inflation is finally cooling has knocked the wind out of sterling, which had been riding high as this year’s best-performing currency in the Group of Seven developed economies just a day ago. The pound was headed for its biggest-one day fall against the dollar since March on Wednesday, mirroring the drop in British government bond yields – which plunged as prices surged – while London blue-chip stocks roared higher, led by interest-rate sensitive shares in homebuilders and landlords. Perhaps sterling’s tumble is no surprise, given that positioning data suggests speculators hold their most valuable bullish bet on sterling since 2014. Yet after data on Wednesday showed inflation slowed to 7.9% in June, below forecasts for a reading of 8.2% and down from May’s 8.7% rate, more traders may now be inclined to book profits.

The prospect of a sustained rise in the Bank of England base rate to above 6% is now almost completely off the table, and with it some of sterling’s shine. “There is likely to be a further repricing of expectations, in our view,” said ABN AMRO senior currency strategist Georgette Boele. “This will probably weigh on sterling this year, especially versus the dollar.” ABN AMRO forecasts sterling to weaken to $1.25 by year-end from around $1.29 currently. Investors have widely perceived the BoE as being behind the curve in the fight against inflation and have consistently banked on UK rates to keep climbing, even after those elsewhere, such as the United States, start to plateau.

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But even with a peak in rates at between 5.75-6.0%, as markets now reflect, Britain would still offer juicier returns than the United States, where rates are expected to rise to around 5.4% from roughly 5.125% currently. “The work is not done yet for the Bank of England. As both wage growth and services CPI inflation remain stronger than the Bank forecasted in May, and signs of a turning point in inflation are only tentative for now, interest rates will be raised further,” BNY Mellon Investment Management financial economist Sebastian Vismara said.

The UK still has the highest inflation of the G7. In the United States, headline consumer price pressures are running at just 3%, while euro zone inflation is at 5%. Energy prices have fallen sharply, which has offered consumers and businesses some respite and another drop is due in July, when regulated household energy tariffs will fall. But mortgage rates are rising fast and grocery inflation is still in double digits – adding to a cost-of-living crisis for British households. Sterling is still up nearly 7% against the dollar this year and until Wednesday’s data, had outperformed all other major currencies. But after the pound’s post-inflation drop, the Swiss franc – up nearly 8% versus the dollar – now takes the top spot.

The pound tumbled 1% to as low as $1.2898 on Wednesday, marking its largest one-day fall since the banking turmoil of mid-March. Two-year gilt yields , meanwhile, fell by around a quarter of a percentage point on the day – also the most since March – to one-month lows around 4.84%. Growing interest-rate differentials have been a big catalyst for the pound. The gap between U.S. and British 10-year borrowing costs was at its widest since early 2009 to a premium of 65 basis points just a week ago. “Looking to the currency, these overshoots and economic signals have been a core driver of FX markets over the past 6 months,” said Joseph Calnan, a corporate FX dealing manager at Moneycorp. “Once inflation eases off, if the drop is sharp enough, we will likely see the pound falling with it – so we need to be prepared for that, too.”

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SOUTH AFRICAN RAND

Reuters: The South African rand dipped on Wednesday after data showed local inflation fell more than expected in June, but moves were slight as traders held off from big bets before Thursday’s interest rate announcement. At 0945 GMT, the rand traded at 17.9425 against the dollar, around 0.4% weaker than its previous close. It had been marginally firmer before the inflation figures were released. Statistics South Africa figures showed consumer inflation slowed to 5.4% year-on-year in June from 6.3% in May, below a Reuters consensus forecast of 5.6% and within the central bank’s target range of 3% to 6% for the first time since April 2022. Easing price pressures bolster the case for the central bank to keep its main interest rate steady on Thursday after 10 hikes in a row, but that was already what most economists predicted.

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Casey Delport, an investment analyst at Anchor Capital, said the rand would probably hover around its current value until the interest rate announcement. “Markets are in a bit of a ‘wait and see’ phase,” she said, adding that Anchor Capital expected the South African Reserve Bank to raise rates by 25 basis points given ongoing rand risks and inflation expectations still exceeding the bank’s preference. The Johannesburg Stock Exchange’s blue-chip Top-40 index was last flat on Tuesday’s close. South Africa’s benchmark 2030 government bond was firmer, as the yield fell 5 basis points to 10.275%.

GLOBAL MARKETS

Reuters: Asian stocks rose and sterling stumbled on Thursday as cooling UK inflation lifted risk appetite ahead of central bank meetings next week, while disappointing earnings results from Netflix and Tesla pushed U.S. futures lower. Meanwhile, China’s yuan shot up after authorities tweaked cross-border financing rules and major state-owned banks were seen selling dollars in moves analysts said were designed to shore up the currency. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.53% higher, on course to snap its three day losing streak. Japan’s Nikkei slid 0.93%. China stocks have been under pressure in recent weeks as soft economic data weighed on sentiment, with investors waiting for meaningful stimulus to jump start the country’s stuttering post-pandemic recovery.

On Thursday, the Shanghai Composite Index was 0.1% higher, while Hong Kong’s Hang Seng Index gained 0.3%. China on Wednesday pledged to make the private economy “bigger, better and stronger” with a series of policy measures designed to help private business. Britain’s high rate of inflation fell more than expected in June to its slowest in over a year at 7.9%, data showed on Wednesday, with markets dialling back expectations of further aggressive rate hikes from the Bank of England. Sterling last fetched $1.2959, up 0.17% on the day, having tumbled 0.7% overnight. The Bank of England is due to meet in the first week of August but before that central bank meetings in Japan, Europe and the United States will likely grab investors’ attention.

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Traders and analysts expect the European Central Bank to raise its benchmark rate by 25 basis points but what comes after that has been up for debate in the wake of recent dovish tone taken by the central bank’s policymakers. The Bank of Japan Governor Kazuo Ueda said this week that there was still some distance to sustainably and stably achieving the central bank’s 2% inflation target, dousing speculation of a hawkish policy shift next week. Markets seem a lot more certain of the Federal Reserve’s next steps, with traders expecting a 25 basis point hike but no more after that. “As investors grow more confident that peak inflation is definitively behind us, so do expectations that the U.S. Federal Reserve’s current rate hiking cycle will finally be over” after next week’s meeting, said Nuveen’s Chief Investment Officer Saira Malik. “Running bulls could be tripped up by cracks in the economy and corporate earnings,” Malik cautioned.

Overnight, the Dow Jones Industrial Average and S&P 500 index rose modestly, with the blue-chip Dow registering its eighth straight day of gains. But futures fell in Asian trade, with E-mini futures for the S&P 500 0.15% lower and Nasdaq futures down 0.44%after earnings from streaming giant Netflix and EV maker Tesla. Netflix disappointed Wall Street on Wednesday with second-quarter revenue that fell short of analyst estimates, while Tesla reported quarterly automotive gross margin in line with Wall Street estimates, though it was a far cry from a year earlier. Tesla CEO Elon Musk signalled that he would cut prices again on electric vehicles even as his all-out price war on automaker rivals squeezes the company’s own margins. Investors will watch out for earnings results from Taiwanese chipmaker TSMC later in the day.

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In the currency market, the onshore yuan jumped after the central bank relaxed a cross-border financing rule, making it easier for domestic firms to raise funds from overseas markets and easing depreciation pressure on the yuan currency. The Australian dollar rose 0.86% to $0.683 after strong domestic jobs data. The Japanese yen strengthened 0.32% to 139.23 per dollar, while the dollar index, which measures U.S. currency against six rivals, eased 0.209%. In commodities, Chicago wheat futures rose 1.4% to hit a three-week high on growing expectations that an attack on Ukrainian ports after Russia’s withdrawal from a Black Sea export deal would have a longer-term impact on global supply. U.S. crude fell 0.11% to $75.27 per barrel and Brent was at $79.62, up 0.2% on the day.

Published by the Mercury Team on 20 July 2023

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