Dollar headed for weekly gain as US economy stays robust

Reuters: The dollar headed for weekly gain on Friday, aided by solid U.S. growth figures that bolstered the case for higher-for-longer interest rates, while the yen hovered on the weaker side of 150 per dollar ahead of a key policy meeting next week.

U.S. DOLLAR HEADED FOR WEEKLY GAIN

The U.S. economy grew at its fastest pace in nearly two years in the third quarter as higher wages from a tight labor market helped to power consumer spending, data on Thursday showed. That added to bets the Federal Reserve is likely to keep monetary conditions restrictive for longer, driving the dollar broadly higher against a basket of currencies. The U.S. dollar index steadied at 106.57, having hit a three-week high of 106.89 in the previous session, and was on track for a weekly gain of about 0.4%.

“Certainly, the U.S. economy is a lot more resilient than most expected. It’s both a blessing and a curse for the Fed,” said Christel Rendu de Lint, head of investments at Vontobel. “But certainly, the chances of a soft landing look greater than most anticipated.” Sterling edged 0.07% higher to $1.21355, though was not too far from a three-week low of $1.2070 hit on Thursday. The euro slipped 0.02% to $1.0560 and was headed for a weekly loss of roughly 0.3%. The European Central Bank on Thursday left interest rates unchanged as expected, ending an unprecedented streak of 10 consecutive rate hikes.

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“With a rapidly deteriorating macroeconomic landscape, as shown by October PMIs, in our view the ECB will have to tread very carefully going into 2024 and will have no choice but to lower interest rates,” said Julien Lafargue, chief market strategist at Barclays Private Bank. Data earlier this week showed euro zone business activity took a surprise turn for the worse this month. Analysts said the dollar was also buoyed by some safe-haven flows, with Asia extending the cautious risk sentiment from Wall Street that saw stocks tumble and kept U.S. Treasuries bid.

“The retreat in yields was to do with a little bit of flight to quality, because what you saw last night was pretty devastating action in the equity market,” said Tony Sycamore, market analyst at IG. Treasury yields move inversely to bond prices. “The last few Fridays we’ve seen very much flight-to-safety type moves because ahead of the weekend, we’re not really sure what’s going to be playing out in terms of Gaza,” said Sycamore. The Australian dollar, often used as a proxy for risk appetite, gained 0.24% to $0.6337, having slid to a one-year low of $0.6271 on Thursday.

The kiwi similarly languished near a roughly 11-month low and was last 0.1% higher at $0.5825. In Asia, the yen remained top of investors’ minds as it stayed on the weaker side of 150 per dollar, a threshold which some see as a potential trigger for intervention by Japanese authorities. The yen last stood at 150.38 per dollar, languishing near the previous session’s one-year trough of 150.78. Data on Friday showed core consumer inflation in Tokyo unexpectedly accelerated in October, keeping pressure on the Bank of Japan to phase out its ultra-loose monetary policy settings.

The BOJ is due to meet next week, amid mounting speculation that the central bank could change its bond yield control, with a hike to an existing yield cap set just three months ago being discussed as a possibility. “If we come in with dollar/yen up at 151 next Monday, then there’s more chance I think they’d lift the cap,” said IG’s Sycamore. “The higher the dollar/yen goes in the interim, the more chance there is of a tweak.”

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BRITISH POUND

Reuters: Sterling sank to a three-week low on Thursday after a slew of economic market data this week affirmed the view that the Bank of England will likely hold rates steady at its policy meeting next week. Sterling is heading for a third consecutive day of declines, down 0.2% to $1.2090, after briefly hitting its lowest since Oct. 4. Against a weakening euro, it touched an almost one-week low before flattening on the day at 87.25 pence. “I would attribute the latest weakening to dovish commentary from the BoE, UK data broadly coming in softer than expected and markets increasingly pricing out the risk of another hike and thus the conclusion of the hiking cycle,” said Kirstine Kundby-Nielsen, an analyst at Danske Bank.

The pound has declined more than 6% against the U.S. dollar over the past three months. Data on Tuesday showed a labour market that was loosening, while the flash reading of the S&P Global UK Purchasing Managers’ Index for the services sector fell in October to 49.2, the lowest reading since January. Although inflation unexpectedly held steady at 6.7% in September, the highest of any major advanced economy, the BoE is expected to leave rates at 5.25% on Nov. 2, according to the vast majority of economists polled by Reuters.

Money markets now are pricing in no further rate increases, and rate cuts as early as June next year. In an interview with the Belfast Telegraph published on Friday, BoE Governor Andrew Bailey said inflation data for September, which failed to fall as most economists predicted, was not far off what the central bank had expected. Adding more evidence on the weakness of the economy, British retailers reported on Thursday their joint-worst October for sales volumes on record and they expect another difficult time in November as households struggle with the higher cost of living, a Confederation of British Industry survey showed.

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“The weakness of the CBI survey has highlighted the headwinds facing the consumer in the UK,” said Jane Foley, head of FX strategy at Rabobank. “Looking forward both the UK and the euro zone face the potential of technical recession suggesting that downside potential for the pound versus the euro could be limited”. Sterling moves on Thursday seem also to be driven by strengthening in the U.S. dollar in anticipation of U.S. GDP data due later, and weakness in the euro as the European Central Bank holds its policy meeting, Kundby-Nielsen said.

SOUTH AFRICAN RAND

Reuters: South Africa’s rand firmed on Thursday, recouping losses from the previous session, with investor focus turning to the mid-term budget next week. At 1704 GMT, the rand traded at 18.9825 against the dollar, about 0.7% stronger than its previous close. The dollar was last up more than 0.2% against a basket of global currencies. Investors are gearing up for the mid-term budget on Nov. 1, when the country’s deteriorating public finances will be in the spotlight. South Africa’s social relief grant, introduced in 2020 to support those hardest hit by the COVID-19 pandemic, is likely to be extended beyond next March, economists said.

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State-owned logistics company Transnet said it had requested an unspecified cash injection from the government as it seeks to reduce debt and return to profitability. Statistics South Africa figures showed September producer inflation came in at 5.1%, above economists’ predictions for 4.7%. Economists at Nedbank said in a note that producer prices were likely to continue rising gradually in the coming months, ending the year around 6% higher than a year earlier. Shares on the Johannesburg Stock Exchange fell, with the blue-chip Top-40 index closing 0.45% lower. South Africa’s benchmark 2030 government bond was weaker in late deals, with the yield up 7 basis points to 10.700%.

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GLOBAL MARKETS

Reuters: Asian shares tracked Wall Street futures higher on Friday as Amazon provided some welcome earnings relief, while bonds were able to sustain a rally amid signs U.S. inflation was easing. All eyes were on U.S. data later in the session that may show core inflation growing 0.3% in September on a monthly basis, pushing the annual rate lower to 3.7% from 3.9% a month ago. Overnight, the European Central Bank left interest rates unchanged as expected, sending the euro briefly to a two-week low. The dollar is is trading above the critical 150 yen level, with traders on guard for any signs of intervention ahead of the Bank of Japan policy meeting on Tuesday. S&P 500 futures rose 0.4% while Nasdaq futures rallied 0.7%, driven by a 5% jump in Amazon shares in after-hours trading. In a statement after the U.S. close, the tech giant predicted higher holiday season sales and a stabilisation in its cloud business.

MSCI’s broadest index of Asia-Pacific shares outside Japan bounced 0.6% on Friday after hitting a fresh 11-month low a day ago. It is, however, on track for a weekly loss of 1.2%. Tokyo’s Nikkei rose 1%, but was still down 1.2% for the week. China’s blue chips were flat, while Hong Kong’s Hang Seng index surged 1%. U.S. data overnight confirmed a resilient economy with inflation easing, feeding soft landing hopes. The U.S. economy grew almost 5% in the third quarter, but a slowdown in expected from here.

“The U.S. economy once again surprised on the upside with U.S. GDP accelerating in the third quarter of 2023,” said Nathaniel Casey, an investment strategist at wealth management firm Evelyn Partners. “However, as rising real yields continue to add pressure to the real economy, the resulting drag on consumption should start to put the brakes on the U.S. economy heading into the coming quarters.” Much attention was on underlying inflation, which subsided considerably last quarter, fuelling hopes that the closely watched U.S. personal consumption expenditures for September on Friday – the Fed’s preferred gauge of inflation – are likely to surprise on the downside as well.

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Published by the Mercury Team on 27 October 2023

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