Dollar at a disadvantage as investors eye global economic outlook

Reuters: The dollar on the back foot on Monday, though it found some safe haven support on lingering worries that the protracted monetary tightening cycles from major central banks would further hurt the global economic outlook.

U.S. DOLLAR ON THE BACK FOOT

Dramatic weekend events in Russia also kept investors on guard, though reaction in the currency market was subdued as they assessed the implications of the aborted mutiny. The euro pared some of its losses from last week and was up 0.05% to $1.0901 in Asia trade. The single currency had fallen to a one-week low on Friday after data showed that euro zone business growth virtually stalled in June amid a deepening downturn in manufacturing activity and a slow expansion of the bloc’s dominant services industry.

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Sterling rose 0.11% to $1.2730, reversing some of its 0.8% fall last week after an outsized 50-basis-point rate increase from the Bank of England stoked fears of a British recession. Flash Purchasing Managers’ Index data on Friday showed Britain’s economy displayed signs of a slowdown this month but inflation pressures stayed high. Meanwhile, U.S. business activity fell to a three-month low in June and the contraction in the manufacturing sector deepened, though the overall picture indicated economic growth ticked up a notch in the second quarter. “Again, there was another set of weak PMI data coming out of Europe,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “By contrast, PMI data in the UK and the U.S. continue to be pretty solid in the face of aggressive interest rate hikes. “The aggressive monetary tightening in the major economies will likely continue to see the global economy continue to deteriorate, which will underpin the safe haven U.S. dollar.”

Against a basket of currencies, the U.S. dollar steadied at 102.74, after a gain of more than 0.5% last week, its first in nearly a month. Elsewhere, the Japanese yen rose more than 0.2% to 143.39 per dollar, though was not far from an over seven-month low of 143.87 hit on Friday. A Bank of Japan policymaker called for an early revision to its yield curve control, a summary of opinions at the June meeting showed on Monday, while the country’s top currency diplomat, Masato Kanda, said the same day that authorities would not rule out any options to respond appropriately to excessive currency moves. The yen has come under renewed pressure in recent weeks amid the stark contrast between the BOJ’s ultra-dovish stance and hawkish central banks elsewhere.

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Traders were also closely monitoring developments in Russia, after heavily armed Russian mercenaries withdrew from the southern Russian city of Rostov under a deal that halted their rapid advance on Moscow but raised questions on Sunday about President Vladimir Putin’s grip on power. That sent the Russian rouble tumbling to a near 15-month low against the dollar in early morning trade on Monday. The risk-sensitive Australian dollar rose 0.04% to $0.6682 after sliding nearly 3% last week, while the kiwi gained 0.37% to $0.6167, having similarly dropped over 1% last week. “The armed uprising in Russia … despite being aborted, lay bare risks of Russian instability from within,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “Risk assets may generally not fare so well, especially if geopolitical risks re-emerge.”

In Asia, China on Monday returned from a holiday, leaving markets on the alert for further support measures from Beijing to stimulate the country’s faltering economic recovery. The onshore yuan fell more than 0.5% to a seven-month low of 7.2199 per dollar, tracking its offshore counterpart, which had weakened past 7.2 per dollar last week. The offshore yuan was last 0.1% lower at 7.2214 per dollar.

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BRITISH POUND

Reuters: The pound fell on Friday, heading for its largest weekly loss in over a month on rising expectations the UK economy could slip into recession after the Bank of England delivered an outsized rate hike in response to persistent inflation. The BoE on Thursday raised interest rates to their highest level since 2008, with a half-point hike that markets had anticipated, but that caught a number of investors off guard. Money markets show UK rates could peak as high as 6% by the end of this year and stay there for another six months, given how entrenched inflation is becoming in the broader economy. Meanwhile, a key market-based gauge of confidence in the economy fell to its weakest since early 2000, reflecting how investors are upping their bets on the UK succumbing to recession.

Sterling fell by as much as 0.5% on the day against the dollar to a low of $1.2685. It later recovered to trade down 0.4% at $1.2702, but was set for a weekly loss of nearly 1%, its largest since mid-May. “What has been interesting has been the pound’s reaction. Normally, a G10 major central bank going for a jumbo rate hike, you’d expect a jump in sterling. But that fact that it’s come off is just a reflection of those fears,” City Index markets strategist Fiona Cincotta said. “Fears of a recession are going to ramp up from now on and that is going to limit sterling’s potential, especially when you’ve got Fed Chair (Jerome) Powell sounding hawkish as well, so there isn’t going to be any respite coming from a weaker dollar.” The pound fared more strongly against other currencies, rising 0.6% against the euro to 85.47 pence after data showed a surprise deterioration in euro zone business activity that could dampen expectations for the European Central Bank to keep raising rates.

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Sterling was down 0.4% against the yen at 181.6 yen, having hit its highest since late 2015 against the Japanese currency this week. Data earlier on Friday showed British retail sales unexpectedly rose in May, boosted by an extra bank holiday to mark the coronation of King Charles, but also suggesting most consumers were – for now – coping with high inflation’s squeeze on their spending power. The resilience of Britain’s labour market has been another factor that has given the BoE very little room to relax its drive to bring inflation back towards its 2% target. Analysts have said many consumers won’t feel the full impact of a string of rate rises yet because a high percentage of homeowners in Britain are on fixed-rate mortgages and will be sheltered from higher borrowing costs for longer.

A separate purchasing managers’ survey on Friday showed Britain’s economy showed signs of slowdown this month, as inflation ran high. Chris Williamson, chief business economist at S&P Global Market Intelligence, said the PMI survey suggested the economy had lost momentum after a brief growth spurt in the spring and looked set to weaken further in the months ahead. “Most notably, consumer spending on services, which was a core growth driver in the spring, is now showing signs of faltering,” he said.

SOUTH AFRICAN RAND

Reuters: South Africa’s rand weakened 1% against the U.S. dollar on Friday as concerns about global economic growth weighed on risk sentiment. At 1241 GMT, the rand traded at 18.7150 against the dollar, 1% weaker than its previous close. Hawkish comments from global central banks, including the U.S. Federal Reserve, stoked fears that their aggressive monetary tightening could push economies into a deeper downturn. The safe-haven dollar was buoyed by the comments and was last trading up 0.48% at 102.870 against a basket of six currencies. “The risk aversion deepened on Friday as recession fears grow in Europe following the publication of much weaker-than-expected PMI data from the Eurozone and UK,” said Fawad Razaqzada, market analyst at StoneX, in a research note.

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The risk-sensitive rand, like most emerging market currencies, often takes cues from global drivers such as U.S. monetary policy and the dollar in the absence of local economic data points. On the Johannesburg stock market, both the Top-40 index and the broader all-share were down about 1.5% on the day, both having lost around 5% since the start of the week. South Africa’s benchmark 2030 government bond was last trading weaker, with the yield up 3 basis points to 10.720%. The Johannesburg Stock Exchange’s Top-40 index tumbled this week

GLOBAL MARKETS

Reuters: Oil was slightly higher on Monday and the rouble lower as an abortive weekend mutiny by Russian mercenaries raised questions about Russian stability and crude supply, but left investors hesitant to draw any further conclusions. Brent crude futures were last up 0.2% at $74.02 a barrel having earlier fetched as much as $74.80. The rouble dropped to a 15-month low early in Moscow. MSCI’s index of Asia-Pacific shares outside Japan slipped to a three-week low, as small falls in China, Taiwan and Australia offset minor gains in South Korea. Japan’s Nikkei eased 0.1%. The battered yen rose marginally on hints at looming government intervention to support it and after a summary showing a central bank board called for an early revision of yield curve control. European futures gained 0.3%, S&P 500 futures rose 0.2% and FTSE futures added 0.1%.

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Russian mercenaries made a short-lived rebellion on Saturday, seizing the southern city of Rostov and advancing on Moscow demanding the removal of Russian military commanders in charge of the war in Ukraine. The private Wagner army then withdrew after striking a deal guaranteeing their safety and the passage of their leader, Yevgeny Prigozhin, to Belarus. The consequences for the Ukraine war were not clear, though the challenge to Russian President Vladimir Putin’s authority was the starkest in decades of his leadership. “I don’t think the market can get its head around working out if there are implications,” said Ray Attrill, head of foreign exchange strategy at National Australia Bank in Sydney. Analysts at RBC Capital Markets said one concern was the possibility of martial law in Russia and its effect on the workforce at ports and oil production facilities.

Gold , which had hit a three-month low on Friday, rose 0.2% to $1,925 an ounce. U.S. Treasuries were firm with yields, which fall when prices rise, marginally lower. Two-year yields fell 2 basis points to 4.731%. Ten-year yields fell 1.8 bps to 3.721%. “This putsch has revealed cracks and fragilities that now cannot be unseen,” said Mizuho economist Vishnu Varathan. “It undeniably amplifies global geopolitical risks.” With the mutiny being on the watchlist rather than driving action in Asia, investors were left to pore over the latest signs of China’s recovery stalling, which on Monday was softer-than-hoped-for travel figures for last week’s holiday. S&P Global also followed most Wall Street banks and cut its 2023 GDP growth forecast for China on Sunday. Blue chip stocks fell 0.7% in Shanghai.

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The yuan slid to catch up offshore falls during the break on Thursday and Friday, but the People’s Bank of China fixed the midpoint of the its trading band surprisingly strong, suggesting it might not be so tolerant of further weakness. The yuan was last at a seven-month low of 7.2199 per dollar. The risk-sensitive Australian dollar was steady at $0.6683. The euro nursed last week’s modest drop at $1.0903 and sterling held at $1.2730. The yen , down nearly 9% this year as global interest rate expectations rise and Japan’s central bank stays dovish, bounced as much as 0.3% to 143.27 per dollar, partly thanks to speculation around intervention or a policy shift. Japan’s top currency diplomat Masato Kanda toughened his tone on Monday, describing recent moves as “rapid and one-sided” in a possible prelude to intervening to buy yen. A Bank of Japan policymaker also called for revision to its yield curve control policy, a summary of opinions at the June meeting showed on Monday, suggesting the central bank’s ultra-loose monetary settings may be at a crossroads.

Published by the Mercury Team on 26 June 2023