Dollar loiters at two-month peak ahead of Powell speech

Reuters: The U.S. dollar loiters at at an over two-month peak on Friday, on course for its sixth straight week of gains as markets await a speech from Federal Reserve Chair Jerome Powell to gauge the path of monetary policy.

U.S. DOLLAR LOITERS AT TWO-MONTH PEAK

Investors will parse through Powell’s address on monetary policy at the Jackson Hole Economic Policy Symposium at 10:05 a.m. ET (1405 GMT) to better understand whether the Fed is done with rate hikes and how long it plans to keep rates elevated. The dollar index, which measures the U.S. currency against six rivals, rose 0.019% to 104.11, the highest since June 7. The index is up 2% in August and set to snap its two-month losing streak.

“Market expects Powell to use the platform tonight to reiterate the ‘higher for longer’ rhetoric given how the U.S. economy has displayed relative resilience,” said Christopher Wong, a currency strategist at OCBC in Singapore. Wong said Powell is likely to stress that policy outcome remains highly dependent on economic data. “The risk is that Powell’s message or tone comes across as less hawkish than expected,” Wong said. “He does not need to be dovish but a less hawkish speech could see dollar ease off.”

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Two Federal Reserve officials tentatively welcomed a jump in bond market yields as something that could complement the U.S. central bank’s work to slow the economy and get inflation back to the 2% target, while also noting they see a good chance that no more interest rate increases will be needed. The policymakers – Philadelphia Fed President Patrick Harker and Boston Fed President Susan Collins – spoke in separate interviews on Thursday.

Data overnight also showed that the number of Americans filing new claims for unemployment benefits fell last week, as labour market conditions remained tight. A recent run of strong economic data has helped ease worries of an impending recession but with inflation still above the Fed’s target, investors are wary that the U.S. central bank is likely to keep interest rates higher for longer. “Whilst it appears the Fed may be done with hiking; how long do they hold rates steady at these levels? That’s the million-dollar question,” said Tom Hopkins, portfolio manager at BRI Wealth Management.

“The market expects the central bank to begin cutting rates in May next year, however I’d be sceptical of this at this juncture as the economic picture may not justify monetary easing.” Futures are pricing the Fed’s overnight lending rate to stay above 5% through June 2024, with about 100 basis points of rate cuts in the second half. The market in early August was betting on about 130 basis points of cuts next year. In other currencies, the euro was down 0.17% to $1.0791, while sterling was at $1.2587, down 0.10% on the day.

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Both currencies were at two-month lows. The yen weakened 0.18% to 146.10 per dollar as the Asian currency straddled the level at which Japanese authorities intervened last year, keeping traders on their toes looking for signs of similar moves this time. The Australian dollar eased 0.05% to $0.642, while the New Zealand dollar fell 0.02% to $0.592.

BRITISH POUND

Reuters: The pound declined against the dollar and euro on Thursday, a day after data showed a contraction in British activity in August, prompting markets to trim expectations for further rate hikes from the Bank of England. Sterling was last at $1.2671, down 0.5% on the day. Wednesday’s soft activity data, which also showed the slowest growth in output prices since February 2021, had traders betting that the BoE will not need to raise rates as high as previously thought to bring inflation back down to target. The central bank has so far raised interest rates 14 times since December 2021, taking them to a 15-year high of 5.25%.

Money market traders still expected the BoE to raise its interest rate to 5.5% next month, but futures now price just a one-in-three chance that rates will hit 6% compared with an over 50% chance seen before yesterday’s activity data. “What the data showed yesterday is that the UK is not isolated to the global growth slowdown,” said Simon Harvey, head of foreign exchange analysis at Monex Europe. “Markets are readjusting to the lower growth profile, taking some of the bets off the table for the Bank of England’s tightening cycle and that’s filtering through,” Harvey added.

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A Reuters poll meanwhile narrowly found that economists expect the BoE’s interest rate to peak at 5.50%, down from 5.75% predicted in July. The pound also slipped 0.3% against the euro with the single currency last buying 85.63 pence. ING’s global head of markets and regional head of research for UK & Central and Eastern Europe Chris Turner expects the euro to gain further against the pound this year, with the BoE close to the end of its rate hike cycle.

“We still think that the BoE will not deliver on the 60 bp of tightening still priced by the markets,” Turner said, “and that EUR/GBP can later this year move back to the 0.87 area.” Traders were now turning their eyes to the Federal Reserve’s three-day Jackson Hole Symposium which begins today. BoE deputy governor Ben Broadbent could give more clues about the future path of monetary policy when he is scheduled to speak on Saturday.

SOUTH AFRICAN RAND

Reuters: The South African rand slid 1% on the last day of the BRICS summit on Thursday, largely due to U.S. dollar strength ahead of the Federal Reserve’s Jackson Hole symposium, analysts said. At 1515 GMT, the rand traded at 18.6950 against the dollar, about 1.1% weaker than its previous close. The rand had gained almost 2% against the dollar on Wednesday after South African inflation data for July came in lower than expected. The dollar was up about 0.4% against a basket of global currencies, bouncing back from a drop on Wednesday and set for a monthly rise.

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Most emerging market currencies were on the back foot on Friday heading into the Jackson Hole symposium, said Danny Greeff of ETM Analytics. Federal Reserve Chair Jerome Powell will speak at the symposium on Friday. “The market is concerned that central bankers – in particular those representing the Fed – might double down on hawkish posturing at the conference,” Greeff told Reuters.

At the BRICS summit in Johannesburg, the group of five developing nations agreed to admit Saudi Arabia, Iran, Ethiopia, Egypt, Argentina and the United Arab Emirates as new members. South African President Cyril Ramaphosa said the BRICS countries – Brazil, Russia, India, China and South Africa – had reached a consensus on the first phase of expansion and that there would be more candidates, hailing a “new chapter”.

On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed 0.34% higher. South Africa’s benchmark 2030 government bond was firmer, with the yield down 9 basis points at 10.200%.

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GLOBAL MARKETS

Reuters: Asian stocks sold off and the dollar scaled an 11-week peak against major peers on Friday, as investors braced for the risk of a hawkish tilt from Federal Reserve Chair Jerome Powell at Jackson Hole. U.S. yields stabilised below 14-year highs. Crude oil found its footing around one-month lows, but remained on course for a second weekly decline amid a firmer dollar and simmering China-centered worries about global growth. Meanwhile, the People’s Bank of China set a much stronger-than-anticipated official mid-point for the yuan – something it has done every day this week – to keep a floor under its currency amid the strains from a robust dollar and a sputtering economy.

MSCI’s broadest index of Asia-Pacific shares sagged 1.2%, but remained on track for a 0.5% gain for the week, which would snap a three-week run of declines. Nerves ahead of Powell’s speech at the Fed’s annual retreat for global central bankers, including the Bank of Japan’s Kazuo Ueda and European Central Bank’s Christine Lagarde, encouraged traders to cash in on the tech-led rally after chip designer Nvidia’s extremely strong financial results following Wednesday’s closing bell.

The tech-centric Nasdaq slumped 2.2% to lead losses of more than 1% across Wall Street’s three major indexes, and futures indicated a flat start at the reopen. Japan’s Nikkei tumbled 2%, with Nvidia supplier Advantest the biggest drag, crashing almost 10%. Hong Kong’s Hang Seng slid 1.1%, with a tech subindex dropping 1.7%. Mainland blue chips drooped 0.4%.

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“It’s all down to Powell,” said Matt Simpson, a senior market analyst at City Index.“In all likelihood, he’ll peddle the ‘higher for longer’ narrative which is likely already priced in, and that leaves the potential for a ‘buy the rumour, sell the fact’ response,” Simpson said. “However, there is also no real reason for Powell to strike a dovish tone,” he added, “and that could mean an ugly end to the week for stocks, while the dollar shines.”

The Fed has been raising rates since March 2022 in an effort to bring down inflation, and investors are looking for clarity on whether more rate increases are ahead and how long the Fed plans to hold rates high. Philadelphia Fed President Patrick Harker set the stage in an interview with CNBC on Thursday, saying he doubted the central bank will need to raise rates again, but also indicated he was not ready to predict when rate cuts might begin.

The U.S. dollar index – which measures the currency against a basket of six developed-market peers, including the euro and yen – pushed as high as 104.20 in Asia, a level last seen in early June. The euro sank to the lowest since mid-June at $1.07845. Against Japan’s currency, the dollar edged back toward last week’s nine-month high of 146.545, last trading at 146.15.

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Tokyo consumer price data on Friday, which front-runs nationwide figures, showed inflation remained well above the BOJ’s target, but slowed for a second straight month, implying less pressure on the BOJ to imminently tweak policy again. The Japanese government bond market was quiet, with the benchmark 10-year note yet to change hands on the day. The yield retreated to 0.645% on Thursday after hitting a 9-1/2-year peak of 0.675% in the previous session. The BOJ unexpectedly doubled the de-facto policy cap on the yield to 1% at the end of last month.

Equivalent U.S. Treasury yields ticked up in Asia time, last sitting at 4.245%, off the previous session’s low of 4.174% but well back from Tuesday’s peak of 4.366%, the highest level since November 2007. The Chinese yuan traded slightly weaker in offshore markets, slipping 0.07% to 7.2866 per dollar. For the week though, it has firmed about 0.28%, pulling away from Thursday’s 9-1/2-month trough of 7.349.

On top of strong signalling with the official mid-point, the PBOC was also directing domestic banks to scale back outward investments, shrinking the supply of yuan overseas. In energy markets, crude prices eased further on Friday, staying on track for weekly declines of between 2-3%. Brent crude fell 16 cents, or 0.2%, to $83.20 a barrel, while U.S. West Texas Intermediate crude fell 18 cents, or 0.2%, to $78.91 a barrel.

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Published by the Mercury Team on 25 August 2023