US dollar index rose as yen and yuan hover near 8-month lows

Reuters: The dollar index rose on Wednesday following comments from a host of global central bank leaders, including Federal Reserve Chair Jerome Powell, who did not rule out the possibility of another rate hike by the Fed at its next meeting in July.

U.S. DOLLAR INDEX ROSE

Powell, speaking at a European Central Bank conference along with Bank of England Governor Andrew Bailey, ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda, noted that two rate rises are likely this year, and did not rule out the possibility of a rate increase at its next policy meeting set for July 25-26. In addition, Powell also said he does not see inflation coming down to the Fed’s 2% target until 2025. Expectations for a 25 basis point hike at the July meeting moved up to 81.8 from 76.9% a day earlier, according to CME’s FedWatch Tool. “It’s not a big change. To me they are all reading from the same scripts from their recent central bank meetings,” said Erik Bregar, director, FX & precious metals risk management, at Silver Gold Bull in Toronto.

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Earlier economic data showed the U.S. trade deficit in goods narrowed in May as imports fell, but was likely not enough of an improvement to keep trade from weighing on second quarter economic growth, although a rise in inventory investment could also offset the drag from trade. The dollar index rose 0.371% to 102.870. The yen, which has been under pressure as the BOJ has been an outlier among global central banks by keeping a loose monetary policy, weakened to a fresh 7-month low of 144.61 per dollar. BOJ Governor Kazuo Ueda said the central bank would see a good reason to alter its monetary policy if it became “reasonably sure” inflation would start to re-accelerate into next year after a period of moderating.

Softness in the yen has prompted warnings from Japanese currency officials this week that the central bank could intervene to prop up the yen, something that last took place when it traded around 145 per dollar. “The only thing kind of notable to me is Ueda’s lack of pushback on yen weakness, so if his position is that other G7 policies are the more dominant factor for yen weakness, he is really opening the door here to further weakness,” said Bregar. The Japanese yen weakened 0.16% to 144.27 per dollar while the euro fell 0.2% against the yen to 157.59 after earlier hitting a new 15-year high of 158.00.

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Lagarde said the ECB is still not seeing enough evidence that underlying inflation has embarked on a downward path, while BoE Governor Andrew Bailey said it remained to be seen if financial markets are correct about the number of interest rate increases they are expecting from the British central bank and how long before the first cut is made. Aside from Lagarde, ECB policymaker Francois Villeroy de Galhau said the length of time the ECB keeps rates elevated is more important than the level itself, although they are currently close to what is needed to get inflation on the path towards a 2% target. The euro was down 0.35% to $1.0921 while sterling was last trading at $1.2647, down 0.78% on the day.

GLOBAL MARKETS

Reuters: Asian shares were subdued on Thursday after global central banks reaffirmed their inflation-fighting resolve, warning rates may need to rise further, while the yen and the Chinese yuan struggled to lift from lows amid fears of official intervention. MSCI’s broadest index of Asia-Pacific shares outside Japan was flat, while markets in Singapore, India and Malaysia are closed for holidays. Chinese blue chips slid 0.3% and Hong Kong’s Hang Seng index fell 0.7%. Japan’s Nikkei, however, gained 1% and was headed for a monthly rise of 8.5% and a quarterly jump of 19%. The offshore yuan hovered near an eight-month trough at 7.24 per dollar on Thursday, after the central bank fixed the daily guidance at the weakest level since November. Overnight, U.S. shares were mixed. The Nasdaq managed a small gain with support from tech stocks, with Apple registered a record closing high, while the Dow closed slightly lower.

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Shares of Micron Technology rose 3% after the bell. The company’s forecast of third-quarter results beat estimates, powered by demand from the booming artificial intelligence and an easing supply glut. At a European Central Bank forum on Wednesday, Federal Reserve Chair Jerome Powell said the Fed will likely raise rates further and did not rule out a a hike for July. Notably, he said he did not see inflation abating to the 2% target until 2025. “The messaging was broadly a continuation of views signposted in previous comments and market reaction was relatively modest,” said Stephen Wu, an economist at the Commonwealth Bank of Australia. Indeed, two-year Treasury yields closed at 4.722% after briefly spiking to 4.778%, as bond market continued to cast doubt on Fed’s hawkishness of two more hikes. They were little changed on Thursday. Futures see about an 80% chance the Fed will raise interest rates by 25 basis points in July, before holding rates steady for the remainder of the year.

European Central Bank President Christine Lagarde, on the other hand, cemented expectations for a ninth consecutive rise in euro zone rates in July. Markets have all but priced in two more rate hikes from the ECB this year. Bank of Japan Governor Kazuo Ueda said the central bank would see good reason to shift monetary policy if it became “reasonably sure” that inflation would accelerate into 2024 after a period of moderation. Investors are now waiting for the U.S. Personal Consumption Expenditures index reading on Friday, the Fed’s favored inflation gauge. Analysts polled by Reuters expect the core rate to be 4.7% on a year-over-year basis, still well above the Fed’s 2% target. “Markets seem stuck in a holding patterns, watching in awe the inconsistencies between risk sentiment, yield curves, data surprises and inflation,” said Mark McCormick, global head of FX and EM Strategy at TD Securities. “For U.S., disinflation is the main driver and sending the strongest directional H2 cue for the USD: choppy but lower.”

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The U.S. dollar was little changed against a basket of major currencies on Thursday, after rising 0.5% overnight, aided by hawkish comments from Powell and quarter-end rebalancing flows. The greenback is down 0.5% in the first half of the year after hitting a decade high last year. The yen regained some composure on Thursday, rising 0.2% to 144.26, but still just a touch below an eight-month low of 144.62 hit overnight, with markets on egde for signs of intervention from Japanese officials. Oil prices were flat on Thursday. U.S. crude futures were little changed at 69.55 per barrel, and Brent crude was down 0.1% at $74.00 per barrel. Gold prices were 0.1% higher at $1,909.59 per ounce.

SOUTH AFRICAN RAND

Reuters: The South African rand weakened on Wednesday, giving up some gains from the previous session, as the U.S. dollar edged higher. At 1229 GMT, the rand traded at 18.7225 against the dollar, around 1.08% weaker than its previous close. The dollar last traded at 102.850 against a basket of global currencies, up 0.322%. Many market participants will turn their attention to a policy panel discussion later this session of five central bank governors, including the Federal Reserve’s Jerome Powell and European Central Bank President Christine Lagarde, said Casey Delport, an investment analyst at Anchor Capital. Like other emerging market currencies, the risk-sensitive rand is susceptible to moves in global drivers such as the dollar, in the absence of local catalysts.

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The rand strengthened at the start of the week as analysts speculated the weekend’s aborted mutiny in Russia may mean President Vladimir Putin could skip a BRICS summit, where South Africa would in theory be obliged to arrest him. The BRICS group of emerging economies — Brazil, Russia, India, China and South Africa — is due to hold the summit in Johannesburg in August. On the Johannesburg Stock Exchange, the blue-chip Top-40 index was last trading about 0.5% stronger than its previous close. South Africa’s benchmark 2030 government bond was stronger, with the yield down two basis points to 10.500%.

BRITISH POUNDS

Reuters: The pound retreated on Wednesday, as traders took profit on sterling’s robust rally this month and after upbeat U.S. data gave investors an excuse to buy dollars. Some caution was expected to stem from the European Central Bank’s annual forum in the Portuguese town of Sintra at which many of the world’s most influential central bankers are to speak. Bank of England Governor Andrew Bailey takes part in a panel discussion later, together with ECB President Christine Lagarde, Federal Reserve Chair Jerome Powell and Bank of Japan Governor Kazuo Ueda. “The question is, once again, whether BoE officials will offer any kind of push-back against those tightening expectations, perhaps to offer some respite to the troubled UK mortgage market,” ING currency strategist Francesco Pesole said. “That hardly seems like a logical move in our view after the hawkish 50bp hike last week and before having seen evidence that price pressures are abating at all.”

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Sterling was last down 0.46% against the dollar at $1.269 and down 0.3% against the euro at 86.28 pence. In June, the pound has risen by 2.3% against the dollar , set for its largest monthly increase since a 2.6% gain in March. It has risen by 5.6% year on year this month, the largest annual increase since October 2021. Speculators, including hedge funds, have loaded up on sterling this month, in anticipation that the BoE will have to raise rates by more than policymakers have signalled, as inflation is too far above the Bank’s 2% target and price pressures are becoming entrenched in the broader economy. Sterling’s strength has been most apparent against the euro, which has lost 2.6% in value against the pound this year, as borrowing costs for the UK have soared above those for the euro zone to their largest premium since mid-1991. Investors therefore have a powerful theoretical incentive to own UK assets rather than euro-based ones.

Money markets show traders believe UK rates will reach at least 6% by the end of this year, compared with an anticipated year-end rate of around 3.9% for the euro zone. “With 119 basis points of BOE hikes priced by year end, a number we think they won’t deliver we expect 75bps, it makes it clear to us that the downtrend in euro/sterling over May and June is over in our view,” Nomura currency strategist Jordan Rochester said. “The question is, will the next few weeks provide negative UK data surprise momentum to change the narrative?”

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Published by the Mercury Team on 29 June 2023