Dollar was restrained as markets weigh US rates outlook

Reuters: The dollar was restrained on Friday by uncertainty over the path of U.S. interest rates, while the yen strengthened after Japan’s core consumer price growth picked up, reinforcing views that the Bank of Japan may soon roll back monetary stimulus.

U.S. DOLLAR WAS RESTRAINED

With U.S. markets closed on Thursday for the Thanksgiving holiday and due for a shorter trading session on Friday, currencies are likely to trade narrowly but possibly with some volatility as liquidity is expected to remain thin. The dollar index, which measures the U.S. currency with six peers, eased 0.058% to 103.71, staying close to the two-and-a-half month low of 103.17 it touched earlier this week.

The index is down 2.8% for the month, on course for its weakest monthly performance in a year on growing expectations that the Federal Reserve is done raising interest rates and could start cutting rates next year. Markets have dialled back expectations of Fed rate cuts in 2024, with futures now showing a 26% chance that the Fed cuts its target rate at the March 2024 policy meeting, according to CME Group’s FedWatch tool. That compares with a 33% chance last week. Meanwhile, Japan’s core consumer price growth picked up slightly in October, after easing the previous month, reinforcing investors’ views that stubborn inflation may push the BOJ to roll back monetary stimulus before long.

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ING economists said they expect the BOJ to move away from its super-accommodative stance next year. “We believe that the BOJ may scrap the yield curve programme as early as the first quarter of next, as Japanese government bonds appear to have stabilised then begin its first rate hike in Q2 2024 if wage growth continues to accelerate next year.” The nationwide core consumer price index, which excludes volatile fresh food costs, rose 2.9% year-on-year in October, government data showed on Friday, against 3.0% expected by economists in a Reuters poll.

The Japanese yen strengthened 0.21% to 149.23 per dollar. The Asian currency has slowly crawled away from the near 33-year low of 151.92 it touched at the start of last week and is up 1.5% for the month. Japan’s factory activity shrank for a sixth straight month in November, while modest growth in the service sector was little changed, a business survey showed on Friday, highlighting the fragility of the economy amid soft demand and inflation. The euro stood at $1.09065, having risen 0.16% overnight after a series of preliminary surveys showed recession in Germany may be shallower than expected, which offset a downbeat reading on French business activity.

Sterling was last at $1.254, up 0.06% on the day. The Australian dollar rose 0.11% to $0.656, while the kiwi rose 0.15% to $0.606. Cash Treasuries resumed trading in Asia after Japan’s holiday on Thursday, with the yield on 10-year Treasury notes up 4.3 basis points to 4.459%. The yield on the 30-year Treasury bond rose 3.6 bps to 4.584%.

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BRITISH POUND

Reuters: Sterling on Thursday rose to its highest against the dollar since early September after data showed British companies returned to growth in November, fuelling hopes Britain will avoid a recession. A day after finance minister Jeremy Hunt delivered a budget update, the S&P Global/CIPS UK Composite Purchasing Managers’ Index showed a preliminary reading above the 50 threshold for growth for the first time since July. Sterling climbed 0.5% against the dollar to $1.2560. It touched its highest of $1.2575 since Sep 6 right after the PMI data. Against the euro, the pound rose 0.24% to 86.93 pence, having briefly touched a nine-day high against the single currency.

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“November’s flash PMIs once again support our view that the UK economy is merely in a state of stagnation as opposed to outright contraction,” said Simon Harvey, Head of FX Analysis at Monex Europe. “In conjunction with structural supply issues which should keep short-term UK rates higher for longer relative to the euro zone, we expect the UK’s better relative growth prospects to support renewed upside in sterling-euro”. But the official outlook for the British economy now anticipates far less growth than previously forecast.

On Wednesday British finance minister Jeremy Hunt delivered a budget update and said gross domestic product is expected to grow by 0.7% in 2024, compared with the expansion of 1.8% forecast in the previous outlook in March from the Office for Budget Responsibility, Britain’s fiscal watchdog. Hunt also announced tax cuts for workers before an expected 2024 election and he gave businesses permanent investment incentives in an attempt to speed up an economy that looks stuck in a rut.

The OBR forecasts showed the consumer price index was expected to rise by 2.8% next year, up from the March forecast of 0.9%. The Bank of England has also warned that inflation could be more persistent than expected. The BoE kept interest rates on hold at its last two meetings after 14 increases in row, and Governor Andrew Bailey suggested interest rates could remain higher for longer than priced by investors. Money markets now expect a first BoE rate cut in June, according to LSEG data.

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SOUTH AFRICAN RAND

Reuters: The South African rand was stronger in early trade on Thursday ahead of a key interest rate decision by the central bank amid high inflation. At 0607 GMT, the rand traded at 18.7850 against the dollar, over 0.6% stronger than its previous close. The dollar last traded around 0.3% weaker against a basket of global currencies. Headline consumer inflation rose to 5.9% year-on-year in October from 5.4% in September, data from Statistics South Africa showed on Wednesday, nearing the top of the central bank’s target range of 3% to 6%.

Investors will focus on the South African Reserve Bank’s main interest rate decision and its Monetary Policy Committee’s tone on the future rate path later in the day. Analysts polled by Reuters predict interest rate to be maintained at 8.25%, its highest since 2009. “Let’s see the tone of the statement, the forecasts and vote split. Presumably, SARB will only pivot after the Fed,” said Rand Merchant Bank analysts in a morning briefing.

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GLOBAL MARKETS

Reuters: Asian shares were dragged lower by China on Friday amid little guidance from Wall Street which was closed for a holiday, while the dollar remained on the back foot as investors bet U.S. rates have peaked. The yen was little changed after data showed that Japan’s core consumer inflation picked up again in October, although by less than expected, and factory activity shrank for a sixth straight month. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.4% but are headed for a weekly gain of 0.9%. It is up a whopping 7.1% so far in November as investors grew increasingly confident that the U.S. rates have peaked, with discussions shifting to the timing and speed of future rate cuts.

Japan’s markets returned from a holiday, with Nikkei climbing 1.0% to charge towards a 33-year high hit on Monday. Chinese bluechips fell 0.3% while Hong Kong’s Hang Seng index tumbled 1.3%, reversing the previous day’s hefty gains. Chinese developers listed in Hong Kong lost 0.7%, after jumping 6.4% on Thursday on more support measures from Beijing to prop up the beleaguered industry. “Since share markets rebounded so quickly, they became technically overbought, so it’s quite possible we go through a period of consolidation in markets,” said Shane Oliver, chief economist at AMP.

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“You get the talk of the so-called Santa rally, but often times Santa rally doesn’t really occur in the last two weeks of December. So we could have a couple of weeks with the markets sort of just meandering around and lacking direction.” Overnight, U.S. markets were closed for the Thanksgiving holiday. In Europe, slightly better than expected euro zone PMIs nudged the euro and shares higher and Sweden’s crown dropped as its central bank left rates on hold. Minutes of the European Central Bank October policy meeting showed euro zone inflation falling as expected, or even a bit faster, but suggested policymakers needed to keep the possibility of an interest rate hike on the table.

Cash Treasuries fell a little as they resumed trading in Asia, with two-year Treasury yields up 2 basis points to 4.9338% and benchmark ten-year yields up 4 bps to 4.4568%. In the currency markets, the dollar < =USD> was on the back foot against its peers at 103.71, nearing a three month low of 103.17. The sterling perched near a 2-1/2 month top at $1.2575, as strong results from a business survey led markets to push back bets on when the first rate cut from the Bank of England might come. Oil prices were mixed after tumbling more than 1% on concerns over the delayed OPEC+ meeting. Brent crude futures were up 0.3% at $81.69 a barrel while U.S. West Texas Intermediate crude fell 0.6% to $76.65 a barrel. Gold prices was flat at $1,992.75 per ounce.