Sterling rose as risk off flows reverse: Rand held its ground

Reuters: Sterling rose on Tuesday, moving further off recent lows and rallying in line with a rebound across markets, as investment flows to safe-haven currencies and assets a day earlier caused by the war in the Middle East reversed somewhat. 

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POUND STERLING ROSE

The pound was 0.5% higher against the Japanese yen at 182.5 yen having fallen a similar amount the day earlier – the yen is typically a beneficiary of a rush to safety in markets – and up 0.2% against the dollar at $1.2265. Other ‘risk’ assets like stocks were also trading higher on Tuesday.

The British currency has managed something of a comeback in recent days against the dollar, rising for the past five sessions after having its worst month in a year in September. Last week it had dropped to a six-month low of $1.20385 as markets reassessed earlier bets of several more rate hikes from the Bank of England. Jane Foley, head of FX strategy at Rabobank said the latest move higher in cable – the pound versus the dollar – was largely a dollar story.

“The dollar has been taking a bit of a breather, as despite the blowout payrolls number on Friday there was enough in the report to keep on track the view that inflation pressures in the U.S. are moderating,” she said. “Yesterday there were a lot of other factors coming into the market, given the events over the weekend in Israel, but by the end of the U.S. session and into today the market moved to recover the initial risk-off move, and that allowed FX markets to think back to U.S. payrolls number on Friday.”

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That data showed U.S. employment increased by the most in eight months in September, though the annual increase in wages was the smallest gain since June 2021. The pound was steady against the euro at 86.39 pence. The British currency weakened as to as much as 87.06 pence per euro in late September, its weakest since May.

SOUTH AFRICAN RAND

Reuters: The South African rand was broadly unchanged in early trade on Tuesday ahead of the release of the results of a national census. At 0607 GMT, the rand traded at 19.3300 against the dollar, the same level as its previous close. The census is the fourth in post-apartheid South Africa and the first in over a decade. On Monday the rand tumbled as violence in the Middle East stoked risk aversion on global markets.

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“In a world of so much uncertainty, it is not surprising to see the dollar-rand pair unable to adopt any clear-cut directional momentum. It is trading in a tight range, and investors are waiting for the dust to settle,” ETM Analytics said in a research note.

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U.S. DOLLAR

Reuters: The dollar was largely rangebound on Wednesday, though remained weighed down by dovish Federal Reserve comments, as traders awaited the central bank’s policy meeting minutes due later in the day for more clues on its interest rate outlook. A slew of Fed officials have signalled in recent days that the U.S. central bank may not need to tighten monetary policy much further than initially thought. Atlanta Fed Bank President Raphael Bostic said on Tuesday the central bank did not need to raise borrowing costs any further, and Minneapolis Fed President Neel Kashkari followed with similar remarks later in the day.

The greenback sat near a two-week low against a basket of currencies on Wednesday and last stood at 105.80. Sterling rose to a three-week high of $1.23035, while the euro last bought $1.0604, not far from Tuesday’s more than two-week top of $1.0620. “The Fed is shifting away from further rate hikes, and its tightening bias too may be dropped by December,” said Thierry Wizman, Macquarie’s global FX and interest rates strategist.

U.S. Treasury yields have similarly tracked lower following the dovish Fed comments, with the two-year yield , which typically reflects near-term rate expectations, hitting a one-month low of 4.9260% on Tuesday. It was last at 4.9990%. The benchmark 10-year yield stood at 4.6407%. The focus now turns to minutes of the Fed’s September policy meeting out later on Wednesday, which could offer further clues on its interest rate outlook. U.S. inflation data is due the next day.

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“I think markets will be particularly interested in whether or not the Federal Open Market Committee will follow through with the extra 25-basis-point hike forecast in its latest dot plot,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “Any comments that are perceived to be slightly dovish, I think the unwind of yields can continue and that can weigh down on the U.S. dollar more.”

The Australian dollar rose to a more than one-week high of $0.6445 while the New Zealand dollar scaled a two-month top of $0.6056, helped slightly by a report saying China is weighing new stimulus measures, though they later reversed those gains. The two Antipodean currencies are often used as liquid proxies for the yuan. The Aussie was last 0.12% lower at $0.64235, while the kiwi fell 0.31% to $0.6029.

China is looking to increase its budget deficit for 2023 as the government prepares to bring a new round of stimulus to help the economy meet Beijing’s annual growth target, Bloomberg News reported on Tuesday. “Markets are still pretty cautious about whether or not the government will introduce a large scale stimulus given they have been reluctant this past year about unleashing any large scale stimulus. So I think markets are a little bit unsure whether that report is real,” said CBA’s Kong.

“If that report is true and Chinese officials come out with a big stimulus package, that will obviously boost the yuan and currencies linked to the Chinese economy.” The yuan was little changed against the dollar in both the onshore and offshore markets, with the onshore yuan last at 7.2942 per dollar.

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GLOBAL MARKETS

Reuters: Asia’s stockmarkets rose on Wednesday and the dollar beat a retreat as a dovish shift in tone from Federal Reserve officials had traders paring U.S. interest rate expectations, though with a wary eye on U.S. inflation data due on Thursday. The S&P 500 gained overnight and MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.3% to a two-week high in morning trade. Japan’s Nikkei rose 0.5%. “I actually don’t think we need to increase rates anymore,” Atlanta Fed President Raphael Bostic told the American Bankers Association, to applause, in Nashville on Tuesday.

The remark follows several Fed officials noting that recent rises in longer-term yields may help do the work of tightening financial conditions and crimping inflation, leaving the central bank with less to do in terms of short-term rate levels. Wagers on whether the Fed might hike again this year have pulled back a bit this week and Treasury yields have come sharply down from 16-year highs, yanking the dollar with them. The 10-year yield fell 12.7 basis points on Tuesday and was steady in Asia on Wednesday at 4.64%, after touching 4.884% in the wake of strong U.S. jobs data on Friday.

On Wednesday the Australian and New Zealand dollars hit their highest levels on the dollar since the end of September, while sterling hit a three-week peak. The euro held at $1.0607, near Tuesday’s two-week high. Moves were small, however, while traders waited on the U.S. CPI figures. “Signs underlying U.S. inflation is moderating could reinforce the more watchful tone from U.S. Fed members about future policy, exerting more pressure on the dollar,” said Peter Dragicevich, strategist at cross-border payments firm Corpay.

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A Bloomberg News report on China preparing stimulus to help its economy also supported the mood, though nerves remained as giant developer Country Garden warned it wasn’t going to be able to meet its offshore payment obligations on time. In commodity markets oil prices have crept lower since bouncing on Monday on concern that Palestinian militants’ surprise attack on Israel could spark a wider conflict.

Brent crude futures steadied at $87.80 a barrel on Wednesday, after hitting $89 on Monday. European gas prices, which had jumped on news of the Middle East violence, surged further on Tuesday on concern a gas pipe in Finland was sabotaged. The subsea link connecting Finland with Estonia, which may take months to repair, was shut on Sunday and on Tuesday Finland’s president said the damage was likely the result of “outside activity”. Benchmark Dutch gas touched a seven-month high on Tuesday and settled 14% higher.

“Europe has higher than usual gas stockpiles for this time of year, as well as lower than normal gas demand, but these buffers still leave Europe exposed to a colder than usual winter and LNG imports in coming months,” said CBA analyst Vivek Dhar. Elsewhere the yen has clung to a small bounce made as the Middle East tension has supported safe-haven assets. U.S. stock futures were steady in Asia. Samsung shares jumped on a smaller-than-expected dive in third-quarter profit and on hopes the memory chip market is finally turning.

Pepsi began U.S. earnings season overnight with an upbeat report showing only a small 2.5% dip in volume but prices up 11% and the company’s chief financial officer saying more rises are coming next year. “Making more money with slimmer volumes is not a horrible outcome,” said Sam Rines, managing director at research firm CORBU in Texas. “With the angst around the consumer and snacks palatable, it is notable that Pepsi gave 2024 guidance and commentary ahead of schedule. And Pepsi’s management team was rather sanguine on the current state of the consumer.”

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Published by the Mercury Team on 11 October 2023

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