Dollar stumbled to over two-month low as markets eye Fed cuts

Reuters: The U.S. dollar stumbled to a two-month low on Monday, extending its downtrend from last week as traders reaffirmed their belief that U.S. rates have peaked and turned their attention to when the Federal Reserve could begin cutting rates.

U.S. DOLLAR DOLLAR STUMBLED

The yuan struck three-month highs in both the onshore and offshore markets, propped up by China’s central bank, while the Australian dollar similarly scaled a three-month top against the falling greenback. The dollar index in Asia trade bottomed at 103.64, its weakest level since Sept. 1, extending its nearly 2% decline from last week the sharpest weekly fall since July.

Markets have priced out the risk of further rate hikes from the Fed following a slew of weaker-than-expected U.S. economic indicators last week, particularly after an inflation reading that came in below estimates. Focus now turns to how soon the first rate cuts could come, with futures pricing in a 30% chance that the Fed could begin lowering rates as early as next March, according to the CME FedWatch tool. “Market pricing for FOMC policy is likely to remain pretty steady, so the dollar should have very few catalysts to move it around this week,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “If we do see risk appetite improve again, then the dollar can definitely weaken further.”

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Against the weaker dollar, the euro rose to an over two-month high of $1.0924, ahead of flash PMI readings in the euro zone due later this week. Sterling was last 0.1% higher at $1.2475. Also due this week are minutes of the Fed’s latest meeting, which will offer some colour on policymakers’ thinking as they held rates steady for a second time earlier this month. “The FOMC minutes may be framed as a ‘Fed pivot’, thereby underscoring risk-on rallies favouring softer U.S. Treasury yields and U.S. dollar, alongside buying in risk assets,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “The upshot is that the FOMC minutes may overstate incremental dovish shifts and likelihood of the Fed’s intended pivot signals.”

The decline in the greenback brought some reprieve for the Japanese yen, which sat on the stronger side of 150 per dollar and last gained 0.4% to 149 per dollar. The risk-sensitive Australian dollar edged roughly 0.5% higher to $0.6546, its strongest level since August, while the New Zealand dollar rose 0.52% to $0.60235. In Asia, China on Monday left its benchmark lending rates unchanged at a monthly fixing, matching expectations, as a weaker yuan continued to limit further monetary easing and policymakers waited to see the effects of previous stimulus on credit demand.

The yuan found some support after the country’s central bank set the currency mid-point at its strongest level since Aug. 11. The onshore yuan rose 0.5% to an over three-month high of 7.1753 per dollar, while the offshore yuan similarly got a boost and jumped roughly 0.6% to an over three-month top of 7.1745 per dollar. The yuan, which has fallen nearly 4% against the dollar this year in the onshore market, continues to be pressured by a faltering economic recovery in China and as investor sentiment remains fragile. “I think the theme of a soft Chinese economic recovery will persist for a while,” said CBA’s Kong. “Until we get a more meaningful recovery in the Chinese economy, I think that will be a headwind for the yuan, Aussie and the kiwi in the near term.”

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BRITISH POUND

FXStreet: The GBP/USD pair attracts some dip-buying during the Asian session on Monday and touched a three-day to, around the 1.2470 region in the last hour. Spot prices, however, remain below the 100-day Simple Moving Average pivotal resistance near the 1.2500 psychological mark and a two-month peak touched last week. The US Dollar struggles to register any meaningful recovery and languishes near its lowest level since September 1, which is seen as a key factor acting as a tailwind for the GBP/USD pair. The US CPI and the PPI report released last week indicated that the high-prices nightmare has finally ended. This should allow the Federal Reserve to maintain the status quo at its December meeting and continue to weigh on the USD.

Furthermore, the markets have been pricing in the possibility that the Fed will start cutting interest rates in early 2024 and engineer an economic soft landing. This dragged the yield on the benchmark 10-year US government bond to a two-month low level of 4.379% on Friday. Apart from this, a generally positive tone around the Asian equity markets further undermines the safe-haven Greenback and lends support to the GBP/USD pair. The markets, however, have brought forward the date at which they expect the Bank of England to begin cutting interest rates from their 15-year peak in the wake of looming recession risks.

The bets were reaffirmed by weaker UK Retail Sales figures, which added to a slew of negative readings last week and fitted with the darkening outlook for Britain’s economy. This might keep a lid on any further appreciating move for the GBP/USD pair. Even from a technical perspective, last week’s rejection near the 1.2500 mark, or the 100-day SMA barrier, makes it prudent to wait for strong follow-through buying before placing fresh bullish bets. In the absence of any relevant market-moving economic releases, either from the UK or the US, the USD price dynamics will continue to play a key role in influencing the GBP/USD pair and allow traders to grab short-term opportunities.

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SOUTH AFRICAN RAND

Reuters: The South African rand weakened on Friday as investors awaited a review of South Africa’s sovereign credit ratings by S&P Global later in the day. At 1512 GMT, the rand traded at 18.4025 against the dollar, around 0.2% weaker than its previous close. In March, S&P downgraded its outlook to stable from positive, citing infrastructure constraints and a severe power crisis. In May it had held off from changing the country’s sovereign credit rating or outlook. “We expect either a drop to a negative outlook or for the agency to wait until the February budget to decide if it needs to make a change,” Investec analyst Lara Hodes said in a research note.

This week, the South African Reserve Bank will announce its interest rates decision. A Reuters poll found that the central bank will keep its repo rate unchanged and wait until May 2024 before cutting it. On the stock market, the Top-40 and the broader all-share indexes closed around 0.2% higher. South Africa’s benchmark 2030 government bond was weaker in late deals, with the yield up 2.5 basis point to 10.075%.

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GLOBAL MARKETS

Reuters: Japanese shares hit highs not seen since 1990 on Monday as strong earnings and offshore demand fuelled a three-week winning streak, while the yuan was nudged higher by China’s central bank. Japan’s Nikkei was back to steady after finally breaking its September peak, and is up 8.8% for the month so far with the Topix not far behind. Financial shares led the gains on Monday as investors prepare for an eventual end to negative rates, while auto makers have been benefiting from a weak yen and high exports. MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.1%, having climbed 2.8% last week to a two-month high.

The Black Friday sales will test the pulse of the consumer-driven U.S. economy this week, while the Thanksgiving holiday will make for thin markets. There were media reports Israel, the United States and Hamas had reached a tentative agreement to free dozens of hostages in Gaza in exchange for a five-day pause in fighting, but no confirmation as yet. Chinese blue chips dipped 0.2% as the country’s central bank held rates steady as widely expected, but set a firm fix for the yuan that saw the dollar slip under 7.2000 to a three-month low.

EUROSTOXX 50 futures added 0.1%, while FTSE futures were a fraction firmer. S&P 500 futures eased 0.1% and Nasdaq futures lost 0.2%. The S&P is now up nearly 18% for the year and less than 2% away from its July peak. Yet analysts at Goldman Sachs note the “Magnificent 7” mega cap stocks have returned 73% for the year so far, compared with just 6% for the remaining 493 firms. “We expect the mega-cap tech stocks will continue to outperform given their superior expected sales growth, margins, re-investment ratios, and balance sheet strength,” they wrote in a note. “But the risk/reward profile is not especially compelling given elevated expectations.”

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Tech major Nvidia reports quarterly results on Tuesday, and all eyes will be on the state of demand for its AI related products. The flow of U.S. economic data turns to a trickle this week, but minutes of the Federal Reserve’s last meeting will offer some colour on policy makers’ thinking as they held rates steady for a second time. Markets have all but priced out the risk of a further hike in December or next year, and imply a 30% chance of an easing starting in March. Futures also imply around 100 basis points of cuts for 2024, up from 77 basis points before the benign October inflation report shook markets.

That outlook helped bonds rally, with 10-year Treasury yields at 4.45% having dropped 19 basis points last week and away from October’s 5.02% high. It also dragged the U.S. dollar down almost 2% on a basket of currencies last week, and helped the euro up to $1.0918 having jumped 2.1% last week. The dollar even lost ground to the low-yielding yen, last down 0.4% at 149.08 and short of its recent top of 151.92. Expectations of another strong wage round and of a high reading for core inflation later this week has stirred more chatter about and eventual tightening by the Bank of Japan.

Futures data showed speculative accounts had expanded their short yen positioning to the highest level since April 2022, suggesting a risk those positions could get squeezed out. Closely watched surveys of European manufacturing are due this week and any hint of weakness will encourage more wagers n early rate cuts from the European Central Bank. “These surveys will be very important around the Euro area services sector given the sharp deterioration seen recently,” said analysts at NAB. “If another soft print eventuates, expect pricing for ECB cuts to extend beyond the current 100bps of cuts being priced for 2024.”

Markets imply around a 70% chance of an easing as soon as April, even though many ECB officials are still talking of the need to keep policy tight for longer. Sweden’s central bank meets this week and may hike again, given high inflation and the weakness of its currency. In commodity markets, oil rebounded from four-month lows on Friday amid speculation OPEC+ will extend, or increase, its production cuts into next year. Brent added 58 cents to $81.19 a barrel, while U.S. crude firmed 49 cents to $76.38 per barrel. Gold was slightly firmer at $1,982 an ounce, having climbed 2.2% last week.

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Published by the Mercury Team on 20 November 2023