Sterling fell sharply after September slump as dollar rallies

Reuters: The pound Sterling fell sharply on Monday, continuing a weak run that saw it drop 3.7% in September, its worst monthly performance in a year. Sterling was last down 0.71% at $1.2115.

BRITISH POUND STERLING FELL SHARPLY

Last week it fell to its lowest level since March at $1.2111 before picking up slightly. It is still slightly up on the year. The euro was roughly flat against the pound at 86.6 pence, in a sign the dollar was driving the action on Monday. The dollar index, which tracks the currency against six peers, rose 0.59% to 106.88, helped by data that showed the U.S. manufacturing sector took a step towards recovery in September as production picked up and employment rebounded.

There was little major British economic data although figures showed that UK house prices in September were 5.3% lower than a year earlier. Prices were unchanged month-on-month. The final reading of a closely watched UK manufacturing survey showed that activity continued to slow sharply in September, although less steeply than the month before. Investors have sold both the pound and the euro as the economic outlook in Britain and the euro zone has darkened after their respective central banks hiked interest rates sharply to tame inflation. Meanwhile, the dollar has rallied on the back of a strong U.S. economy and rising bond yields.

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“I think the UK is in a very difficult place,” said Jamie Niven, senior fixed income portfolio manager at Candriam. “If there’s one area where I think recession is more likely than not, it’s the UK.” Investors will be keeping an eye on the ruling Conservatives’ party conference in Manchester this week. Finance Minister Jeremy Hunt is due to speak on Monday and confirmed in a morning media round that Britain’s minimum wage would rise to at least 11 pounds ($13.42) an hour from 10.42 pounds.

“Whilst not a normally market moving event, there is a risk that the Conservatives feel a need to roll the dice given the size of Labour’s poll lead,” said Nicholas Rees, FX market analyst at broker Monex Europe, referring to the main opposition party. The main event in markets this week is the release of U.S. employment figures on Friday. A strong reading would bolster the argument that the U.S. Federal Reserve will keep interest rates high for a long time – an idea that pushed U.S. bond yields to their highest level since 2007 last week.

U.S. DOLLAR

Reuters: The dollar index climbed on Monday, building on four straight weeks of gains, after the U.S. government avoided a shutdown and economic data again supported the view that the Federal Reserve will keep interest rates higher for a longer period of time. U.S. manufacturing took a step further toward recovery in September as production picked up and employment rebounded, according to an Institute for Supply Management survey that also showed prices paid for inputs by factories falling considerably. The U.S. Congress passed a stopgap funding bill late on Saturday with overwhelming Democratic support after Republican House Speaker Kevin McCarthy backed down from an earlier demand by his party’s hardliners for a partisan bill.

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Treasury yields rose, with the benchmark 10-year note hitting 4.703%, as averting a government shutdown reduced demand for U.S. debt, while the data highlighted the economy’s resiliency despite the Fed’s target rate in restrictive territory. “It’s the feeling that the U.S. economy can stomach higher interest rates for a little bit longer,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto. “Implicitly it also means that the Fed might not be so quick to cut rates next year either,” he said.

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The dollar index rose 0.62% to 106.89, with the euro down 0.75% to $1.0491. The Japanese yen weakened 0.31% versus the greenback at 149.77, after falling to 149.90. “You are still seeing the U.S. growth story is much better than abroad and that is probably going to keep that interest rate differential widely in its favor,” said Edward Moya, senior market analyst at Oanda in New York. Fed Governor Michelle Bowman said she remained willing to support another increase in the central bank’s policy interest rate at a future meeting if incoming data showed progress on inflation was stalling or proceeding too slowly.

Investors have been closely watching for signs of intervention in the Japanese currency by the Bank of Japan. The yen has come under pressure against the dollar as the BOJ remains a dovish outlier among global central banks, especially since the Fed began its aggressive rate-hike cycle in March 2022. A summary of opinions at the Bank of Japan’s September meeting showed more policymakers discussed the prospects of an eventual exit from ultra-loose policy, while the central bank also said it would conduct additional bond buying operations, as it seeks to slow a rise in yields after the benchmark reached its highest in a decade.

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Japan’s Finance Minister Shunichi Suzuki said authorities were closely watching FX moves with a “strong sense of urgency” as it neared the 150 mark, but declined to comment on whether intervention was a possibility at this point.

SOUTH AFRICAN RAND

Reuters: The South African rand slumped on Monday, dragged down by local purchasing managers’ data that showed factory activity shrank for the eighth month in a row in September. At 1325 GMT, the rand traded at 19.1475 against the dollar, 1.1% weaker than its previous close. The dollar was last up around 0.37% against a basket of global currencies. The Absa Purchasing Managers’ Index showed that local manufacturing activity contracted due to depressed demand and constrained production.

“The drop in the PMI today weakened the rand, pulling it back to R19.00/USD on disappointment of a much weaker than expected figure, although the rand’s reaction could prove temporary,” Investec economist Annabel Bishop said in a research note. Monday’s fall reversed gains made by the rand on Friday after U.S. Treasury yields lost some steam and risk appetite returned to the market. On the Johannesburg Stock Exchange, the blue-chip Top-40 index last traded around 0.6% weaker than its previous close. South Africa’s benchmark 2030 government bond was weaker, with the yield up 7 basis points to 10.880%.

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GLOBAL MARKETS

Reuters: Asian shares fell on Tuesday after Federal Reserve officials cemented the view that U.S. interest rates are likely to remain elevated for some time, while the yen slid to near a one-year low, putting traders on watch for intervention from Japanese authorities. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.36% to their lowest since Nov. 28, 2022. Japan’s Nikkei fell 1.5%, while Hong Kong’s Hang Seng Index was 1% lower. Chinese markets were closed for the week because of the Golden Week Holiday. U.S. Federal Reserve officials said that monetary policy will need to stay restrictive for “some time” to bring inflation back down to the Fed’s 2% target.

“I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way,” Fed Governor Michelle Bowman said Monday in prepared remarks to a banking conference. Still, the hawkish rhetoric from the Fed officials comes as an ongoing debate over another possible rate hike this year rages on. Fed funds futures traders are pricing in a 26% chance of a rate hike in November, and a 45% likelihood of an increase by December, according to the CME Group’s FedWatch Tool.

Australia’s S&P/ASX 200 index was 1.27% lower, while the Australian dollar eased 0.16% to $0.635 ahead of the policy decision from the Reserve Bank of Australia later on Tuesday, where the central bank is expected to hold rates steady. All but two of 32 economists in a Sept. 27-28 poll conducted by Reuters expected the RBA to hold its official cash rate at 4.10%. Two forecast a 25 basis-point hike. “We still think there is one more hike in the pipeline, either for next month’s meeting or the December meeting,” said Rob Carnell, Asia-Pacific head of research at ING.

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“If it were down to us, we would wait for another month of rising inflation and the third-quarter inflation numbers. The market is not looking for any further tightening until next year.” In the foreign exchange market, the focus remains on the Japanese yen as the currency inches closer to the 150 per dollar mark – a level traders have speculated could lead to intervention from the authorities. The yen was last at 149.83 per U.S. dollar in Asian hours, having scaled a fresh near 12-month low of 149.895 earlier in the session.

Last September, Japanese authorities conducted their first intervention in 24 years, when the yen weakened past 145 per dollar, and speculation has mounted that they will step in again with the yen under constant pressure due to a yawning yield gap against the dollar. Japanese Finance Minister Shunichi Suzuki said on Tuesday authorities were watching the currency market closely and stood ready to respond, repeating a warning against speculative moves that did not reflect economic fundamentals.

The dollar index, which measures the U.S currency against six major rivals, rose 0.093% to scale a fresh 10-month peak. The yield on 10-year Treasury notes was down 0.7 basis points to 4.676% in Asian hours after touching 4.703%, the highest since October 2007, in the Monday session. The yields got a boost after an agreement to avert a partial U.S. government shutdown reduced demand for the debt before key jobs data this week. U.S. crude fell 1.04% to $87.90 per barrel and Brent was at $89.73, down 1.08% on the day. Meanwhile, spot gold dropped 0.4% to $1,820.50 an ounce. U.S. gold futures fell 0.27% to $1,825.00 an ounce.

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Published by the Mercury Team on 3 October 2023

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