Sterling close to 3-month high versus euro

Reuters: Sterling close to 3-month high against the euro on Tuesday, as markets raised their bets on rate cuts by the European Central Bank, which widened their divergence with the Bank of England.

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BRITISH POUND STERLING CLOSE TO 3-MONTH HIGH

Higher interest rates attract investors’ demand and boost the value of a currency. Money markets fully price in more than 140 bps of ECB rate cuts next year, from around 135 bps the day before, with the first move in March, while almost fully discounting a first BoE cut in June 2024.

Sterling was flat at 85.80 pence per euro. It retraced earlier this week after hitting its highest since Sept. 11 on Friday at 85.60 pence per euro, as analysts have mixed views about the policy path of the ECB and the BoE. “When it comes to EUR/GBP, the drop appears to be overdone, and we expect a gradual dovish repricing in Bank of England rate expectations to favour a rebound above 0.8600, although that may not happen in the very short term,” said Francesco Pesole forex strategist at ING.

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Dovish commentary from the ECB has now seen investors expecting a deeper easing cycle in the euro zone than in the UK. BofA recently argued that BoE will likely stay on hold for most of 2024, and markets finally see signs that the message that rates might have to stay high for an extended period is finally being heard. The British public’s expectations for inflation over the medium to long term, which the Bank of England closely watches, rose in October, supporting a higher-for-longer view. Andrzej Szczepaniak, economist at Nomura, said the market pricing for ECB near-term rate cuts appears too aggressive in response to inflation expectations.

He forecasts the next moves to be rate cuts in September 2024 for the ECB and August for the BoE as ongoing weakness in the surveys continued to suggest mild recessions in the euro area and the UK. “We see 125 bps of cuts in both cases, taking rates down to 2.75% for the ECB and 4% for the Bank of England over similar time frames – by early 2025. Deeper recessions could bring that timing forward,” he said. The pound was down 0.1% against the U.S. dollar, which regained some ground on Tuesday and hovered near a one-week high ahead of key economic indicators later this week. “We still think that a convergence towards the key 1.2500 and even the 100 and 200-day MA at 1.2470 are more likely than a further rally given room for a dollar rebound, although US data means risks are quite binary,” ING’s Pesole said.

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U.S. DOLLAR

Reuters: The dollar was near a two-week high against a basket of currencies on Wednesday as investors assessed U.S. economic data that showed a cooling labour market, while wagering the Federal Reserve will cut rates next year. The dollar index, which measures the U.S. currency against six rivals, was 0.019% higher at 103.99, having climbed 0.3% overnight. The index is up 0.5% this month, after sliding 3% in November, its steepest monthly decline in a year. Data on Tuesday showed U.S. job openings fell to more than a 2-1/2-year low in October, the strongest sign yet that higher interest rates were dampening demand for workers. Data also showed there were 1.34 vacancies for every unemployed person in October, the lowest since August 2021.

The focus will now shift to the Friday release of the November jobs report to provide clues on the strength of the economy ahead of the Fed’s policy meeting next week. “This week the highlight is payrolls report,” OCBC currency strategist Christopher Wong said, adding that a downside surprise could see dollar rebound stall. Fed officials are now in a blackout period ahead of the U.S. central bank’s Dec. 12-13 meeting, where a key focus will be the updated projections of where they see rates at in 2024.

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Traders have priced in 99.7% chance of the Fed standing pat next week but a 56% chance of the central bank cutting rates in March, according to CME’s FedWatch tool. ANZ analysts forecast conditions for the Fed to start cutting interest rates will emerge around the middle of 2024 but cautioned Chair Jerome Powell will need to maintain hawkish guidance during the transition to lower growth and inflation. The widely expected rate cuts in 2024 will result in the dollar loosening its grip on other G10 currencies next year, dimming the outlook for the greenback, according to Reuters poll of foreign exchange strategists.

Meanwhile, the euro was at $1.0795, having dropped to three-week low of $1.07785 on Tuesday. Investors believe the European Central Bank could deliver its first rate cut by March. Inflation across the euro zone has fallen more quickly than most anticipated, as evidenced by last Thursday’s consumer price data. Sterling was last at $1.2601, up 0.06% on the day. The Japanese yen strengthened 0.03% to 147.12 per dollar. The offshore Chinese yuan eased 0.09% versus the greenback to $7.1657 per dollar. Ratings agency Moody’s on Tuesday cut China’s credit outlook to “negative” on Tuesday. In cryptocurrencies, bitcoin surged above $44,000 – its highest since April 2022 – and was last at 43,995. The world’s largest cryptocurrency has gained 150% this year, fuelled in part by optimism that a U.S. regulator will soon approve exchange-traded spot bitcoin funds.

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SOUTH AFRICAN RAND

Reuters: The South African rand fell on Tuesday as third-quarter gross domestic product contracted slightly more than expected and the U.S. dollar rose on global markets. At 1615 GMT, the rand traded at 18.9950 against the dollar, around 1% weaker than its previous close. The dollar last traded around 0.2% stronger against a basket of global currencies. Q3 GDP contracted 0.2% quarter-on-quarter in seasonally adjusted terms and 0.7% year-on-year, versus expectations for a quarter-on-quarter decline of 0.1% and 0.2% annually.

The latest figures mean Africa’s most industrialised economy grew just 0.3% in the first nine months of the year, further evidence that its economic recovery from the COVID-19 pandemic has been among the worst in emerging markets. A PMI survey on Tuesday also showed South African private sector business activity flatlined in November, with a cooling of price pressures counteracted by supply chain disruptions due to a port crisis. On the Johannesburg Stock Exchange, the blue-chip Top-40 index ended down 1.1%. South Africa’s benchmark 2030 government bond weakened, with the yield up 5 basis points to 10.01%.

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GLOBAL MARKETS

Reuters: Asia-Pacific equities gained on Wednesday as bets firmed for a peak in interest rates among major central banks globally, as bond yields continued to decline. Japanese government bond yields dipped to the lowest since mid-August as U.S. Treasury yields hovered close to a three-month trough. Meanwhile, crude oil sank to a nearly five-month low, while bullion held steady after dropping back from an all-time high. Bitcoin traded just below $44,000 following its surge this week to a 20-month peak.

U.S. 10-year Treasury yields held steady at around 4.186% after touching 4.163% on Tuesday as cooling labour market data cemented views that the Federal Reserve is done hiking rates, with bets on a first cut coming by March now at around 64%, according to the CME Group’s FedWatch tool. Benchmark JGBs yields slid in sympathy, reaching the lowest since Aug. 16 at 0.62%. Lower borrowing costs boosted equity markets, with big tech a particular beneficiary. Japan’s Nikkei surged 1.6%, rebounding from Tuesday’s mid-November low, while Australia’s stock benchmark jumped 1.4% and South Korea’s KOSPI added 0.56%.

U.S. stock futures also pointed higher, with the tech-heavy Nasdaq indicated up 0.4% following a 0.31% advance overnight for the cash index. S&P 500 futures rose 0.26%, after the cash index ended Tuesday flat. Overnight, U.S. jobs figures came in softer than expected, but coupled with robust services data, added to the narrative for a soft landing for the economy as the Fed shifts to monetary easing, analysts said. The “selloff in yields across the curve is strong evidence of the intense focus the market has on this week’s labour market data,” with the ADP employment report due later on Wednesday and non-farm payrolls on Friday, said IG analyst Tony Sycamore.

For the Nasdaq, “although we remain bullish into year-end, we are not contemplating opening fresh longs at these levels,” Sycamore added, recommending buying on dips instead. Chinese equities underperformed on Wednesday, with sentiment fragile after ratings agency Moody’s slapped a downgrade warning on China’s credit rating. Hong Kong’s Hang Seng rose 0.41%, supported mainly by a rally in tech, with a sector subindex climbing about 1%. Mainland Chinese blue chips were flat.

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With markets all but certain the Fed’s next move is a cut, dovish rhetoric from European Central Bank officials overnight and the Reserve Bank of Australia’s decision to hold policy steady on Tuesday have stoked bets for a peak in rates globally. The Bank of Canada is widely expected to adopt a wait-and-see attitude later on Wednesday as well. That has supported the U.S. currency’s rebound from last week’s nearly four-month low versus major peers, with the U.S. dollar index steady at around 103.95 on Wednesday, compared with a trough of 102.46 a week ago.

“The USD weakened when the Federal Reserve looked like they were cutting while other central banks were holding tight,” said James Kniveton, a senior corporate FX dealer at Convera in Melbourne. “Now that looks to be changing, and other central banks are following the Fed’s lead.” The dollar added 0.08% to 147.265 yen, while the euro was little changed at $1.07935. Gold was flat just below $2,020, catching its breath following its surge to a record $2,135.40 on Monday. Bitcoin was steady at around $43,850 after pushing as high as $44,490 overnight, buoyed by both Fed rate cut expectations and speculation U.S regulators will soon approve exchange-traded spot bitcoin funds.

Crude eased further on Wednesday, weighed down by the worsening demand outlook from China, and doubts about the impact of OPEC cuts. Brent crude futures fell 8 cents, or 0.1%, to $77.12 a barrel, while U.S. WTI crude futures were down 13 cents, or 0.2%, at $72.19 a barrel. Both benchmarks closed at their lowest since July 6 in the previous session.

Published by the Mercury Team on 6 December 2023