Pound dipped near five-week low versus dollar

Reuters: The pound dipped against the dollar though it firmed against the euro on Monday as markets continued to digest the previous week’s 25-basis-point rate increase by the Bank of England, and its implications for future monetary policy.

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BRITISH POUND DIPPED

Sterling was last at $1.27215, down 0.24%, in line with Monday’s broad strengthening of the dollar, and holding just above its five-week low against the dollar of $1.26200 hit briefly after the Bank of England’s move. The BoE raised rates by 25 bps to 5.25% last Thursday, a slowdown from its 50 basis point hike in June, but said high inflation meant rates would remain elevated for some time. Currencies are very sensitive to central bank policy at the moment and markets are pricing in two more 25-basis-point rate increases from the BoE.

This compares to pricing that reflects expectations that the U.S. Federal Reserve is finished with its hiking cycle and a reasonable chance the European Central Bank could be done as well. The euro was at 86.23 pence, down 0.17%. “I think markets, in terms of the pound, are slowly digesting where the Bank of England is going to end up,” said Nick Rees, FX analyst at Monex Europe. “That’s the key for us in terms of where the pound ends up, and that’s really going to really hang on the jobs and wages data that we see next week.” “It’s a case of wait and see, and perhaps wait to see what Huw Pill says later today.”

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British second-quarter GDP data is due Friday, though Rees said it was unlikely to spark a major reaction in the pound. The week’s main event for currency markets is U.S. inflation data, due Thursday, which will underscore or challenge market expectations that the Fed has finished its rate-raising cycle.

U.S. DOLLAR

Reuters: The dollar turned decisively higher on Tuesday as traders struggled to get a grip on the diverging growth outlooks between the world’s two largest economies, while at the same time grew immune to another disappointing set of Chinese trade figures. China’s exports fell an annual 14.5% in July while imports contracted 12.4%, data on Tuesday showed, marking the biggest decline in outbound shipments from the world’s second largest economy since February 2020. The yuan and the Australian and New Zealand dollars extended their fall in an initial knee-jerk reaction to the figures, but soon pared some of those losses on the belief that the weak data only reinforced the need for further stimulus measures from Beijing.

The offshore yuan was last 0.24% lower at 7.2214, while the Aussie slipped 0.35% to $0.6551. The kiwi fell 0.27% to $0.60905. The two Antipodean currencies are often used as liquid proxies for the Chinese yuan. “Those weaker exports and imports figures just underscores the weak external and domestic demand in the Chinese economy,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “I think markets have grown increasingly insensitive to disappointing Chinese economic figures … we’ve got to a point where weak data will just reinforce calls for further policy support.”

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Elsewhere, the U.S. dollar rose broadly and eked out a 0.6% gain against its Japanese counterpart to last trade at 143.31 yen. Data on Tuesday showed that Japanese real wages fell for a 15th straight month in June on relentless price hikes, but nominal pay growth remained robust amid rising salaries for high-income workers and a broadening labour crunch. While currency moves had been minimal in the early Asian day, the dollar extended its gains over the course of the trading session as risk sentiment turned fragile and Asian stocks failed to ride Wall Street’s rally. “It’s become a wave of U.S. dollar buying for sure,” said Sean Callow, a senior currency strategist at Westpac. “Perhaps the market was just expecting that there would be a more upbeat tone to risk appetite today, given U.S. equities rallied.”

Sterling edged 0.25% lower to $1.2753, while the euro fell 0.17% to $1.0982. The common currency had slipped against the U.S. dollar in the previous session on news that German industrial production dropped more strongly than forecast in June. The dollar index rose 0.26% to 102.34, edging away from a one-week low it hit on Friday in the wake of a mixed U.S. jobs report which pointed to a cooling, but still resilient labour market. That added to hopes of a soft-landing scenario in the world’s largest economy even in the face of the Federal Reserve’s aggressive rate hikes.

All eyes are now on Thursday’s inflation data where expectations are for core consumer prices in the United States to have risen 4.8% on an annual basis in July. “Some will argue that U.S. growth is very robust at present, which would naturally cause greater inflation risk,” said Gary Dugan, chief investment officer at Dalma Capital. “With the Fed’s interest rate policymaking remaining data dependent, every data point has been eliciting an even higher level of vigilance.”

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SOUTH AFRICAN RAND

Reuters: The South African rand fell on Monday, adding to losses of more than 4% against the dollar last week, as global markets were in a cautious mood after a mixed U.S. jobs report and before U.S. and Chinese inflation figures later this week. At 0927 GMT, the rand traded at 18.6400 against the dollar, about 1% weaker than its closing level on Friday. The dollar was up around 0.2% against a basket of global currencies.

Casey Delport, an investment analyst at Anchor Capital, said it was difficult to pinpoint exactly what had caused markets to shift to a risk-off footing, but that while that persisted the rand would be on the defensive. She said one factor was recent economic data out of the United States which had made some traders speculate that the Federal Reserve will raise interest rates again in September.

A major focus for markets this week will be inflation data out of China, Germany and the United States. “This data can recalibrate the market’s outlook on monetary policy once again, which will feed directly into currency prices, thus a cautious start to the week is envisaged,” Rand Merchant Bank analysts said in a research note.

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On Monday, South Africa will hold its weekly Treasury-bill auction, while central bank data showed the country’s net foreign reserves rose in July to $55.626 billion. The Johannesburg Stock Exchange’s blue-chip Top 40 index was little changed. South Africa’s benchmark 2030 government bond was slightly weaker, with the yield up 5.5 basis points to 10.315%.

GLOBAL MARKETS

Reuters: Asian share markets were mostly weaker on Tuesday but the dollar strode higher as investors digested weaker Chinese trade data ahead of key inflation readings from China and the United States due later this week. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.7%, after U.S. stocks ended the previous session with mild gains. The index is down 2.9% so far this month. In early European trades, pan-region Euro Stoxx 50 futures were down 0.11% at 4,352, German DAX futures were down 0.08% at 15,998, and FTSE futures were down 0.13% at 7,530. U.S. stock futures, the S&P 500 e-minis , were down 0.21% at 4,528.3.

Data showed China’s imports contracted at 12.4% in July, missing forecasts for a drop of 5%, while exports fell 14.5%, compared with a fall of 12.5% tipped by economists. The offshore yuan fell to a more than two-week low of 7.2334 per dollar, while its onshore counterpart similarly bottomed at an over two-week low of 7.2223 per dollar. The Aussie weakened 0.38% to $0.6549, while the kiwi slid 0.55% to $0.60735. The dollar rose 0.46% against the yen at 143.15 . It is still some distance from its high this year of 145.07 hit on June 30.

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The yield on benchmark 10-year Treasury notes rose to 4.0442% compared with its U.S. close of 4.078% on Monday. The two-year yield , which rises with traders’ expectations of higher Federal Reserve fund rates, touched 4.7598% compared with a U.S. close of 4.758%. The European single currency was down 0.1% on the day at $1.1002 while the dollar index, which tracks the greenback against a basket of currencies of major trading partners, was up at 102.24. Hong Kong’s Hang Seng Index started to recover some ground lost earlier in the day, but was still down 1.26% after opening 1.73% in the red. Sentiment rebounded in China as the blue chip CSI300 index turned positive to be up 0.07% after initially shedding 0.54%. Australian shares were up 0.15%, while Japan’s Nikkei stock index rose 0.29% after earlier trading up by nearly 0.8%.

Global investors are keenly awaiting inflation readings from China on Wednesday and the U.S. on Thursday, expecting them to show stark differences in price movement in the world’s two biggest economies. U.S. inflation likely accelerated slightly in July to an annual 3.3%, while the core rate was likely unchanged at 4.8%, according to a Reuters poll of economists. ANZ predicts China’s July consumer price index to come in at minus 0.4% year-on-year. “China inflation has been quite low but that is because economic growth has been slowing down and not met expectations,” said Wei Li, BNP Paribas Asset Management multi asset portfolio manager. “Inflation should start to pick up when growth does and we expect that to happen in the second half.”

The prospect of economic stimulus from China’s central government to reinvigorate a soft economy is still being contemplated by investors. Minor measures to help property markets have been delivered in the past fortnight, but no broad stimulus has been outlined. “While awaiting ominous signs of deflation, markets are torn between economic gloom and hopes of resounding stimulus that is set to re-ignite China’s growth,” Mizuho economists said. “We are however unconvinced that Beijing’s stimulus efforts will achieve intended ‘lift-off’ for the still struggling economy.” U.S. crude ticked up 0.21% to $82.11 a barrel. Brent crude rose to $85.46 per barrel. Gold was slightly lower with the spot price at $1934.1667 per ounce.

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