Sterling fell to six-month low: Yen and Euro languish

Reuters: Sterling fell to six-month low against a strengthening dollar on Wednesday as markets are pricing in that the Bank of England (BoE) is done hiking interest rates as the economy deteriorated, while British inflation subsided.

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BRITISH POUND STERLING FELL

Sterling is set for the biggest monthly drop since August 2022, down more than 4% in September, as money markets are pricing in no further BoE rate hikes this year, according to LSEG data. Traders also expect the central bank to start cutting rates next summer.

The BoE kept rates on hold last week – the first meeting at which it had done so since December 2021 – on the back of signs economic growth is slowing and data showing a surprise cooling in Britain’s inflation. Sterling dropped 0.06% to $1.2150 , after briefly touching $1,2135, its lowest since March 2023. It has been steadily sliding from a 15-month high in July, but is still up almost 18% from a year ago when former British Prime Minister Liz Truss’ borrowing plans drove it to a record low.

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The British currency rose 0.1% against the euro to 86.87 pence, after touching on Tuesday its lowest of 87.05 pence against the single currency since May. “The capitulation in terminal rate expectations, allied to the realization that the BoE is now done hiking rates due to building macro headwinds, underlines residual sterling headwinds,” Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said. Recent data showed British companies endured a much tougher September than feared, marked by growing unemployment and recession risks.

The next key releases are consumer credit and mortgage approvals due on Friday, which will likely maintain ongoing pressure on sterling, Stretch added. The prospect of higher-for-longer U.S. rates supported the dollar index, sending the greenback to its highest level since November against a basket of peers.

SOUTH AFRICAN RAND

Reuters: The South African rand extended losses on Wednesday, after tumbling the day before on the back of soaring U.S. Treasury yields. At 1501 GMT, the rand traded at 19.1275 against the dollar, about 0.24% weaker than its previous close. The dollar last traded around 0.35% stronger against a basket of global currencies.

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On Tuesday, the rand lostnearly 1.7% against the greenback at one point on the back of a surge in U.S. Treasury yields as investors turned away from riskier assets. “ZAR ‘losses’ this week are really just USD gains,” said Rand Merchant Bank analysts in a research note, adding that continued hawkish Fed talk has kept alive the risk of another hike, strengthening the dollar. The rand, like other risk-sensitive currencies, is often swayed by global factors like U.S. monetary policy.

South Africa will release producer price inflation, money supply, trade balance and budget figures for August on Thursday and Friday, which will give clues on the health of the economy. Shares on the Johannesburg Stock Exchange fell, with the blue-chip Top-40 index closing over 0.7% weaker. South Africa’s benchmark 2030 government bond, with the yield up 5.5 basis points to 10.830%.

GLOBAL MARKETS

Reuters: Oil prices scaled one-year highs on Thursday while world stocks eyed their longest losing streak in two years as worries deepened about persistently high interest rates, sending investors to shelter in the safety of a surging U.S. dollar. A surprisingly big drop in U.S. crude stocks has stoked concern that fuel demand is outstripping production right when markets least needed another supply-side shock. U.S. crude rose 3.6% on Wednesday and another 1% on Thursday to hit $95 a barrel for the first time since August 2022. Brent futures hit a one-year high at $97.69.

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The prospect of higher energy costs and the spectre of sticky inflation put more pressure on longer-dated bonds. Benchmark 10-year Treasury yields were steady in Asia, but at 4.599% are up more than 50 basis points this month. “It doesn’t help,” said ING economist Rob Carnell. “What’s really starting to weigh on stocks is this upwards push in Treasury yields, and it’s a pretty sensible response,” he said, with equities at risk of further losses even if bonds rebound. Traders are also watching lawmakers’ efforts to avoid a U.S. government shutdown.

MSCI’s index of global equities moved a fraction lower and could notch its 10th straight daily fall on Thursday, which would equal a long losing streak from 2021. MSCI’s index of Asia-Pacific shares outside Japan was pinned near a 10-month trough. U.S. and European futures fluctuated either side of flat. Japan’s Nikkei fell 1.8%, with investors selling stocks that went ex-dividend. The strong dollar has the Japanese yen within a whisker of 150-per-dollar, seen as a level likely to provoke an official response or intervention. Dollar/yen hit 149.71 on Wednesday and traded at 149.40 on Thursday in Asia. The euro dropped 0.7% to a nine-month low of $1.0488 on Wednesday and last bought $1.0503.

German and Spanish inflation data are due later in the day, as are a number of central banker appearances, most notably Federal Reserve Chair Jerome Powell at 2000 GMT. Chinese markets limped toward a long holiday that begins on Friday and the break may be a welcome one for traders since recent weeks have brought a drumbeat of bad news and selling. On Thursday shares in cash-strapped developer China Evergrande were suspended in Hong Kong after a report that chairman Hui Ka Yan was under police watch. The stock, once worth more than HK$30, had closed at HK$0.32 on Wednesday. Investors worry a liquidation would further damage the tanking property market and stifle signs of recovery in parts of the Chinese economy.

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“China’s property-sector stress will continue to pose cross-sector credit risks in the near term,” said Fitch Ratings on Thursday. “The government’s modest policy easing to date is unlikely to drive a sharp turnaround in homebuyers’ sentiment.” The Hang Seng fell 1% and is close to a 10-month low. The mainland CSI300 fell 0.2%. China’s yuan is also coming under pressure and only a very strong fixing of its trading band has held off sellers. The yuan last changed hands at 7.3057 per dollar, not far from the weaker extremity of its trading band.

Higher energy prices helped the Australian dollar to stabilise at $0.6378. Gold is heading for its worst week since February as the rise in Treasury yields drives investors out of the precious metal, which pays no yield, and it nursed losses at $1,875 an ounce.

Published by the Mercury Team on 28 September 2023