The pound fell again, a year on from ‘mini-budget’ record low

Reuters: The pound fell for a fifth day on Tuesday as rising U.S. bond yields supported the dollar, but is still up 18% from a year ago when former British Prime Minister Liz Truss’ borrowing plans drove it to a record low.

BRITISH POUND FELL

Traders believe the Bank of England (BoE) has almost certainly reached the end of its campaign of raising interest rates, after the central bank last week left monetary policy unchanged with the economy slowing and inflation drifting lower.

Sterling has been steadily sliding from a 15-month high in July, as it has become increasingly clear from macroeconomic data and from central banks’ rhetoric that interest rates are more likely to rise in the United States than in the UK. The dollar is headed for a 2.4% rise in September, egged on by 10-year U.S. Treasury yields hitting their highest since before the financial crisis in 2007, after the Federal Reserve signalled last week rates will stay higher for longer.

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The pound was last down 0.3% at $1.2174, around its lowest since March. It is set for its biggest monthly loss since last September, when it hit a record low of $1.0327 after the Truss government unveiled a “mini budget” that contained up to 45 billion pounds ($54.77 billion) in unfunded tax cuts. Given how much of the decline in sterling is down to the strength in the dollar right now, its performance against the euro gives a cleaner read of investor sentiment towards sterling, RBC Europe chief currency strategist Adam Cole said. “Sterling, until very recently, has been propped up by expectations for more BoE hikes and that is diminishing after the three hits that we took last week,” he said.

A cooler August inflation reading, a survey of British business activity that showed far more weakness than expected in early September, and the BoE’s decision to leave interest rates unchanged knocked 1.1% off sterling’s value. “There is half a rate hike priced in going forward and, if that unwinds – which we think it probably will on balance – then there may be a little more sterling underperformance to come on the back of that,” Cole said. He added his team have a year-end target of 89 pence for the euro/sterling exchange rate, implying a drop of around 2.4% for the pound from 86.95 pence, where it was trading on Tuesday.

With the erosion of its so-called yield advantage, the pound is now virtually flat on the year, having boasted an 8% gain back in July and ranked as the best-performing G10 currency against the dollar of 2023. Strategists at Nomura last week cut their sterling target to $1.18 and cited the monetary policy outlook in the United States as the main justification for the likely strength in the dollar. On a more UK-specific note, they pointed to several factors that do not make for a supportive backdrop for the pound, including outflows of capital from British stocks and bonds, an overhang of bullish speculative positions and British data surprises.

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U.S. DOLLAR

Reuters: The dollar rose to a 10-month high against its major peers on Wednesday, toppling the euro and sterling to 6-month lows and pushing the yen deeper into intervention territory, as the prospect of higher-for-longer U.S. rates gripped markets. U.S. Treasuries stabilised after a heavy selloff in recent days, though yields remained elevated and kept the greenback solidly bid. The euro was last 0.14% lower at $1.05575, after slumping to a six-month low of $1.05555 earlier in the session. The single currency was on track to lose more than 3% for the quarter, its worst quarterly performance in a year.

Sterling was similarly down 0.09% at $1.2146 after hitting a six-month trough of $1.2141 earlier on Wednesday, and was headed for a quarterly loss of more than 4%. The U.S. dollar index meanwhile peaked at a 10-month high of 106.30. “The U.S. dollar is stickier to the upside than the downside,” said Tina Teng, market analyst at CMC Markets. “It’s been a shock for markets since last week because the Federal Reserve’s rhetoric was more hawkish than expected … I think it’s more likely they would hike rates for one more time.”

Fed officials have in recent days flagged the possibility that the central bank would need to raise interest rates further, after it kept rates steady last week but stiffened its hawkish monetary policy stance. That has sent U.S. Treasury yields scaling multi-year highs in recent days as money markets adjust their expectations of where U.S. rates could peak, and for monetary conditions to remain tighter for longer than initially thought.

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The benchmark 10-year yield was last at 4.5255%, after hitting a 16-year high of 4.5660% in the previous session. The two-year yield stood at 5.0644%. The elevated U.S. yields have spelt trouble for the yen , which edged marginally higher to 149.03 per dollar, after having slipped to a 11-month low of 149.185 on Tuesday. The dollar/yen pair tends to be extremely sensitive to changes in long-term U.S. Treasury yields, particularly on the 10-year front. The yen’s slow-but-steady decline to the psychological level of 150 per dollar has kept traders on high alert for any signs of intervention from Japanese authorities, as officials ramp up their rhetoric against the sliding currency.

The 150 zone is seen by some as a red line that would spur Japanese authorities to intervene, like they did last year. “The fundamental upside pressure to dollar/yen from bond yields is simply too great to ignore,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “Even if there were intervention, it won’t drive dollar/yen down permanently unless bond yields start to retreat in earnest too.” Minutes of the Bank of Japan’s July meeting out on Wednesday showed that policymakers agreed on the need to maintain ultra-loose monetary settings but were divided on how soon the central bank could end negative interest rates.

Elsewhere, the Aussie fell 0.20% to $0.6385, barely blinking to Wednesday’s data pointing to an acceleration in Australia’s inflation last month, matching expectations. “Today’s report does nothing to change the dial for the Reserve Bank of Australia in my view, who will likely hold rates at 4.1% at their next meeting,” said Matt Simpson, senior market analyst at City Index. The New Zealand dollar slipped 0.23% to $0.5931.

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SOUTH AFRICAN RAND

Reuters: The South African rand weakened on Tuesday on the back of a surge in U.S. Treasury yields as investors turned away from riskier assets, analysts said. At 1153 GMT, the rand traded at 19.0175 against the dollar, more than 1.3% weaker than its previous close. The dollar was little changed against a basket of global currencies.

“I suspect the rand is playing catch-up to the rest of the market after the long weekend,” Danny Greeff, co-head of Africa at ETM Analytics, told Reuters. Trade was closed on Monday due to a national holiday. On Monday, U.S. Treasury yields reached 16-year highs, putting pressure on South African bonds. “The yields on some South African government bonds are reaching highs not seen since the onset of the pandemic as investors rotate away from risk,” Greeff said.

South Africa’s benchmark 2030 government bond was weaker, with the yield up 11.5 basis points to 10.770%. On Tuesday, central bank data showed that South Africa’s composite leading business cycle indicator, which collects data on vehicle sales, business confidence, money supply and other factors, rose 0.1% month-on-month in July. On the Johannesburg Stock Exchange, the blue-chip Top-40 index last traded around 1.35% weaker from its previous close.

GLOBAL MARKETS

Reuters: Asia stocks traded mixed on Wednesday and benchmark U.S. Treasury yields were near multi-year highs, as investors sour on both stocks and bonds amid worries about the impact of higher-for-longer interest rates. The dollar index further rose after hitting a 10-month high on Tuesday, while the Japanese yen came closer to a key level where Japanese officials are seen as potentially intervening to shore up the currency.

Profits at China’s industrial firms fell 11.7% in the first eight months from a year earlier, official data showed on Wednesday. In Australia, inflation picked up in August, driven by a surge in fuel prices, but the gain was in line with expectations. A Bank of Thailand rate decision is due later in the day. Early in the Asian trading day, MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.1%. The index is down 3.7% so far this month. U.S. stock futures, the S&P 500 e-minis, were up 0.13%. Australian shares were down 0.25%, while Japan’s Nikkei stock index slid 0.47%. China’s blue-chip CSI300 index was 0.41% higher in early trade. Hong Kong’s Hang Seng index advanced 0.8%.

On Tuesday, Wall Street’s major stock indexes followed Asian and European equities lower as investors continued to digest last week’s indication from the Federal Reserve that it would keep rates higher for longer than investors had previously expected. The Dow posted its biggest one-day percentage drop since March, while all three major averages ended at their lowest closing levels in well over three months. The Dow Jones Industrial Average fell 1.14%, the S&P 500 lost 1.47% and the Nasdaq Composite dropped 1.57%.

In currencies, the dollar index, which tracks the greenback against a basket of currencies of other major trading partners, advanced 0.085% to 106.3, after hitting 106.21 on Tuesday, the highest since Nov. 30. The European single currency was down 0.1% on the day at $1.0564, having lost 2.56% in a month. The Japanese yen remained weak versus the greenback at 149.06 per dollar. The dollar’s strength against the yen in particular has kept traders on alert for an intervention to prop up the Japanese currency, especially after Finance Minister Shunichi Suzuki said no options were off the table. The 150 yen per dollar level is seen by financial markets as a red line that would spur Japanese authorities to act, as they did last year. “USD/JPY traded in a fairly narrow range overnight and is currently trading just above 149. Higher U.S. Treasury yields and recent dovish comments from Bank of Japan (BoJ) officials have weighed on USD/JPY,” CBA analysts said in a note. “We see a high risk the BoJ intervenes soon to prop up the JPY.”

In treasuries, benchmark 10-year Treasury yields have climbed to 16-year highs in the wake of the Federal Reserve’s hawkish longer-term rate outlook last week. The yield reached 4.5274% on the day, compared with its U.S. close of 4.558% on Tuesday. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 5.0603% compared with a U.S. close of 5.077%.

Oil prices settled higher after reaching a two-week low earlier in Tuesday’s session, as investors weighed expectations of tighter supply against demand concerns stemming from an uncertain economic outlook. U.S. crude ticked up 0.34% to $90.7 a barrel. Brent crude rose to $94.26 per barrel. Gold was slightly higher. Spot gold was traded at $1901.204 per ounce.

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Published by the Mercury Team on 27 September 2023