Dollar eased from a 12-week peak: Asia shares rally

Reuters: The dollar eased from a 12-week peak on Monday as traders weighed the U.S. monetary path after the Fed Chair Jerome Powell left open the possibility of further interest rate increases, while the yen hovered close to its lowest in over nine months.

DOLLAR EASED FROM A 12-WEEK PEAK

In an eagerly awaited speech at the annual Jackson Hole Economic Policy Symposium, Federal Reserve Chair Powell promised to move with care at upcoming meetings as he noted both progress made on easing price pressures as well as risks from the surprising strength of the U.S. economy. “We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” Powell said in a keynote address. “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so.”

The dollar index, which measures the U.S. currency against six rivals, eased 0.115% to 104.05, but not far from the 12 week high of 104.44 it touched on Friday. The index is up over 2% in August and set to snap a two month losing streak. Markets anticipate an 80% chance of the Fed standing pat next month, the CME FedWatch tool showed, but the probability of a 25 basis point hike in November is now at 48% versus 33% a week earlier. “It remains unlikely we get a hike from the Fed in September, said Chris Weston, head of research at Pepperstone. “But November is shaping up to be a ‘live’ event, where data points have the potential to throw interest rate expectations around.” “When many other G10 central banks are already priced for an extended pause, the Fed potentially going again in November is supporting the dollar,” Weston said.

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A series of strong U.S. economic data releases has helped ease worries of a recession but with inflation still above the Fed’s target, some investors are worried that the U.S. central banks will keep interest rates at elevated levels for longer. With the Fed highlighting the importance of the upcoming U.S. economic data, investor focus this week will firmly be on reports on payrolls, core inflation and consumer spending. “If the data continues to show an ease in labour market tightness and price pressures, then the Fed is likely done with its tightening cycle,” said Rodrigo Catril, senior currency strategist at National Australia Bank. “If the data doesn’t play ball, then further tightening should be expected.”

The yen weakened 0.03% to 146.45 per dollar, not far off the more than nine month low of 146.64 it touched on Friday as traders continue to watch out for any signs of intervention in the currency market from Japanese authorities. The Bank of Japan will maintain its current ultra-easy policy as underlying inflation in Japan remains “a bit below” its target, the central bank’s governor said on Saturday. Meanwhile, the euro and the sterling came off two-month lows touched on Friday. The single currency was up 0.04% to $1.0804, while the pound was last at $1.2599, up 0.17% on the day. The Australian dollar rose 0.55% to $0.644, while the New Zealand dollar gained 0.32% versus the greenback to $0.592.

BRITISH POUND

Reuters: The British pound dropped to a 10-week low on Friday as investors rein in expectations of where they think the Bank of England’s interest rate might peak after recent soft activity data. S&P Global’s flash purchasing managers’ index for August, released on Wednesday, showed business activity contracted, indicating the UK economy was on course to shrink in the third quarter and prompting markets to scale back tightening bets. Sterling was last down 0.1% at $1.2591, having earlier dropped to its lowest level since June 13 at $1.2560. The euro stood at 85.72 pence , also down 0.1%. “Weaker than-forecast retail sales last week and dismal PMI this week have raised concerns over the health of the UK economy and recession fears,” said Fiona Cincotta, financial market analyst at City Index.

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The dollar was broadly stronger, also rising against the yen and euro, before Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde took the stage at the Jackson Hole Symposium later on Friday. BoE Governor Andrew Bailey is skipping the event, with Deputy Governor Ben Broadbent representing the central bank at the Wyoming meet-up on Saturday. “His remarks are scheduled for tomorrow, so we’ll need to wait for Monday to see any impact on sterling,” said ING FX strategist Francesco Pesole. “The recent volatility in the BoE peak rate expectations on the back of data releases means the return of some BoE comments after a long period of silence can definitely move the market.”

Markets are still pricing in with near certainty that the BoE will raise its key interest rate for a 15th straight meeting in September to 5.5%, but with only around 60 basis points worth of tightening still priced, markets think a peak at 6% is now a long shot. “We have seen a paring back of terminal rate expectations and even the prospect of hitting 5.75% is becoming increasingly less likely,” said Jeremy Stretch, CIBC Capital Markets head of G10 FX strategy, adding that sterling could fall towards the $1.2470 region in coming weeks.

Meanwhile, data showed British consumers’ mood perked up in August as lower inflation made individuals less downbeat about the outlook for their personal finances, but overall sentiment remained fragile. The GfK consumer sentiment indicator rose to -25 in August from a three-month low of -30 in July, its biggest rise since April although still below the average of -10 for the survey, which has been running since 1974.

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SOUTH AFRICAN RAND

Reuters: The South African rand pared some losses on Friday, on improved market sentiment during the European session, ahead of a speech by the U.S. Federal Reserve Chair that could set the tone for future interest rate hikes in the world’s biggest economy. At 1150 GMT, the rand traded at 18.6475 against the dollar, about 0.9% stronger than its previous close. The rand has had a turbulent week, contributing to its over 4% losses month-to-date. The dollar was little changed against a basket of global currencies.

On Friday, Jerome Powell will give a speech at the Jackson Hole Symposium for global central bankers. The market is bracing for a hawkish tone from Powell, which could point to further U.S. rate hikes. “Given how high U.S. Treasury yields have risen in recent weeks, the risk is that Powell’s comments are interpreted by the market as dovish, even if he tries to maintain a balanced or even slightly cautious tone,” Danny Greeff of ETM Analytics told Reuters.

The risk-sensitive rand often takes cues from global factors like U.S. monetary policy in the absence of domestic economic data cues. “The rand will trade at the mercy of Jackson Hole-generated headlines into the weekend,” Greeff added. South Africa’s benchmark 2030 government bond was weaker, with the yield up 2 basis points at 10.220%. On the Johannesburg Stock Exchange, the blue-chip Top 40 index last traded around 0.3% higher from its Thursday close.

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GLOBAL MARKETS

Reuters: Asian shares rallied on Monday as China announced new measures to support its ailing markets, though the mood was cautious ahead of readings on U.S. jobs and inflation that could decide whether interest rates have to rise again. Beijing on Sunday announced it would halve the stamp duty on stock trading in the latest attempt to boost the struggling market and followed steps to support the housing market. The help was needed given profits at China’s industrial firms fell 6.7% in July from a year earlier, extending this year’s slump to a seventh month. Investors welcomed any aid they could get and Chinese blue chips jumped 3.0% in choppy trade, coming off their lows for the year so far.

Eyes are now on the official PMI for August out on Thursday which is still expected to show activity is in the red. “We believe these latest measures are in line with the directive from the July Politburo meeting, when the authorities pledged to invigorate China’s capital markets, but do not represent a meaningful increment in policy support for reviving the real economy,” wrote analysts at Nomura in a note. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.4%, having eked out minor gains last week to break a three-week losing streak. Japan’s Nikkei rose 1.5%, underpinned in part by the persistent weakness of the yen.

The improvement in risk sentiment saw EUROSTOXX 50 futures add 0.7%, while FTSE futures were closed for a holiday. S&P 500 futures and Nasdaq futures both edged up 0.1%, extending last week’s modest rise. The market did manage to weather a slightly hawkish outlook from Federal Reserve Jerome Powell, who reiterated they might have to raise rates again but promised to move “carefully”. “We take this to mean that the FOMC does not intend to hike at the September meeting,” wrote analysts at Goldman Sachs. “We continue to expect that the FOMC will ultimately decide that further policy tightening is unnecessary, making the hike at the July FOMC meeting the last of the cycle.”

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Futures imply around an 80% chance of a steady outcome at the Sept. 20 meeting, but a 58% probability of a hike by year end. Much will depend on the flow of U.S. data which had been running hot until a batch of manufacturing surveys last week pointed to a slowdown both at home and abroad. That raised the stakes for this week’s ISM survey on manufacturing, along with reports on payrolls, core inflation and consumer spending. Median forecasts are for payrolls to rise 170,000 in August with a steady jobless rate of 3.5%. Analysts at JPMorgan cautioned that job gains could be depressed by the entertainment industry strike in Hollywood and are tipping an increase of just 125,000.

Figures on EU inflation this week may also be instrumental in whether the European Central Bank decides to hike next month. The market is evenly split on whether there will be another rise in the 3.75% rate, with ECB President Christine Lagarde on Friday emphasising that policy needed to be restrictive. This was a common theme among Western central banks, with Bank of England Deputy Governor Ben Broadbent over the weekend saying rates might have to stay high “for some time yet.” The odd man out was Bank of Japan Governor Kazuo Ueda who on Friday reiterated the need for policy to stay super loose.

That divergence kept the yen under pressure and early Monday the dollar was firm at 146.50, within a whisker of Friday’s near 10-month top of 146.64. The euro was close to its highest since October last year at 158.27 yen. The single currency has had less luck on the dollar, which gained broad support from higher Treasury yields, and stood at $1.0801 having slipped for six weeks in a row. Yields on U.S. two-year notes were up at 5.104% after touching their highest since early July on Friday. High yields and a strong dollar have been a headwind for gold which was idling at $1,915 an ounce. Oil prices drew some support from a sharp rise in U.S. diesel prices, though concerns about Chinese demand remains a drag. Brent edged up 22 cents to $84.70 a barrel, while U.S. crude rose 21 cents to $80.04 per barrel.

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Published by the Mercury Team on 28 August 2023