The US dollar clung to gains with central banks in focus

Reuters: The dollar clung to gains against the euro on Monday after recent economic data showed a stronger U.S. economy and a slowing euro zone as traders look beyond a trio of central bank meetings this week for clues to the outlook for monetary policy.

U.S. DOLLAR CLUNG TO GAINS

A closely-watched purchasing managers’ survey showed that U.S. business activity slowed to a five-month low in July, dragged down by decelerating service sector growth, but the data was better than similar surveys out of Europe. Falling U.S. input prices and slower hiring indicated the Federal Reserve could be making progress on important fronts in its bid to reduce inflation. “When you survey the global picture, there are more reasons to be optimistic about the U.S. than almost anywhere else, which translate to the dollar,” said Adam Button, chief currency analyst at ForexLive in Toronto. “The U.S. economy really is the best of a mediocre bunch.”

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The euro was down 0.49% at $1.1069 while sterling was last trading at $1.2823, down 0.25% on the day, kicking off a busy week for central bank meetings with investors expecting rate hikes in Europe and the United States. The dollar index rose 0.247% to 101.330 , while futures expect the Fed’s overnight rate will rise to 5.43% in November and stay above 5% until June 2024. The Japanese yen strengthened 0.24% versus the greenback to 141.47 per dollar. The Fed concludes a meeting on Wednesday, followed by the European Central Bank a day later and the Bank of Japan on Friday, as well as earnings from many heavyweight companies.

Investors expect both the ECB and Fed to raise rates by 25 basis points and the focus in both cases is on the signals they send around their September meetings. Softening inflation gauges might allow the Fed room to hint at a pause. “The Fed probably won’t raise rates again at its September meeting after this week’s hike, but with the U.S. economy in better shape for now, the euro is bearing the brunt of the broad dollar strength,” said John Velis, head of Americas macro strategy at BNY Mellon Markets in New York. The BOJ is the most likely of the three central banks to throw up a market-moving surprise, traders say, with a tweak to its yield curve control policy seen as a possibility.

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Last Friday the Japanese currency dived to as weak as 141.92 per dollar, also sliding on crosses, following a Reuters report that the BOJ was leaning towards keeping its yield curve control policy unchanged, though volatility gauges have spiked as the meeting looms. “There’s a deep sense of unease around what might come next from the Bank of Japan,” said ForexLive’s Button.

BRITISH POUND

Reuters: The pound headed for a seventh straight day of losses on Monday against the dollar, its longest losing streak since the onset of the pandemic in 2020, after a survey showed Britain’s private sector growing at its slowest pace in six months in July. The S&P Global/CIPS composite Purchasing Managers’ Index showed a preliminary reading of 50.7, down from 52.8 in June in the biggest month-on-month drop in 11 months. Although above the 50-level that separates growth from contraction, it was the weakest reading since January.

Sterling was last down 0.2% on the day at $1.2827 having touched a session low earlier of $1.2808 after a preliminary survey of UK business activity showed a downturn in British manufacturing deepened, while the service sector also slowed. “Rising interest rates and the higher cost of living appear to be taking an increased toll on households, dampening a post-pandemic rebound in spending on leisure activities” said Chris Williamson, chief business economist at S&P Global, which produces the data. “Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets,” he said.

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The pound has fallen for seven days in a row against the dollar, its longest losing streak since mid-March 2020. Rate expectations in Britain have fluctuated wildly this month. Two weeks ago, money markets showed traders believed UK rates would peak at around 6.2% by next June. Data points that have pointed to slowing inflation and weaker growth have prompted a reassessment that shows traders expect a peak of just 5.77% in rates by February, from 5% now.

In that time, the pound has fallen almost every day, losing around 2.6% in value. And yet speculators have built their most valuable bullish bet on sterling since 2014, according to weekly data from the U.S. markets regulator. “Unsurprisingly, the pound weakened on the back of the scaling back of interest rate expectations, retreating to $1.2850 from its recent high of $1.31,” Rupert Thompson, chief economist at Kingswood Group, said. “The silver lining here for UK investors was that this transformed last week’s gain in global equities of 0.6% in local currency terms into a 2.3% rise in sterling terms,” he said.

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One of the drivers for flows into sterling this year has been the yield advantage it has boasted over U.S. Treasuries. Two-year gilt yields traded at their biggest premium to two-year Treasuries since mid-2011 just three weeks ago, at 45 basis points. That gap has since shrunk to parity.

SOUTH AFRICAN RAND

Reuters: The South African rand strengthened more than 1% against the dollar on Monday, after weaker business activity in the UK, euro zone and United States suggested fewer global rate hikes might be needed. At 1512 GMT, the rand traded at 17.7575 against the dollar, about 1.2% stronger than its previous close. The dollar was firm, trading around 0.2% stronger against a basket of global currencies. Central bank interest rate decisions in major economies are the focus with week, with investors expecting rate hikes from the U.S. Federal Reserve on Wednesday and the European Central Bank on Thursday.

South Africa’s central bank kept rates unchanged last week after 10 consecutive hikes. “The ZAR enjoyed some tailwinds this afternoon as the market pared bets on an extended global rate-hike cycle after some weak Eurozone and UK PMI data,” said Danny Greeff, co-head of Africa at ETM Analytics. Rising gold and coal prices provided additional support, he added.

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The rand has gained more than 5% since the start of July. On the Johannesburg Stock Exchange, both the blue-chip Top-40 index and the broader all-share index closed 0.08% lower. South Africa’s benchmark 2030 government bond was stronger, with the yield down 7.5 basis points to 10.260%.

GLOBAL MARKETS

Reuters: Asian shares jumped and the yuan rose on Tuesday as investors cheered China’s pledge to step up support for its sputtering economy, with the heaviest buying in Hong Kong’s beaten-down property sector while the dollar dipped against key rivals. MSCI’s broadest index of Asia-Pacific shares outside Japan snapped a six-day losing streak with a 1.5% gain. Japan’s Nikkei fell 0.4%. In China, the Shanghai Composite Index rose 1.9% and the Hang Seng leapt 3% with property stocks that had been diving on debt repayment worries bouncing back. Country Garden jumped 14% and was the top-traded stock in Hong Kong while its onshore-traded debt recovered to slightly less distressed levels. Shares in its services arm and rival Longfor rose by more than 20%.

China’s top leaders pledged on Monday to step up help for the economy amid a tortuous post-COVID recovery and signalled there would be more to come for the property industry. “Perhaps the biggest move was the pledge to ‘adjust and optimise property policies,’ which opens the door for further property easing,” said Citi analysts. “The Chinese economy could muddle through the second half amid such a policy setting.” An index of mainland developers jumped 11% on Tuesday and was headed for its best day in eight months.

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In the currency market, the Chinese yuan strengthened about 0.5% to 7.1526 per dollar, helped by state banks selling dollars onshore and offshore early in Asia. The move set the tone across other pairs and the dollar index , which measures the U.S. currency against six major rivals, eased 0.1% to 101.31. The China-sensitive Australian dollar rose 0.4% to $0.6767. The kiwi added 0.2% to $0.6215. A big session of earnings lies ahead, along with the release of the euro zone bank lending survey on Tuesday before the Federal Reserve takes centre stage on Wednesday.

Unilever, LVMH and EssilorLuxottica report in London and Paris. Microsoft, Google parent Alphabet, Visa, General Electric, chipmaker Texas Instruments are among the heavyweights in the U.S. Markets anticipate 25-basis-point rate hikes from both the Fed and the European Central Bank this week but beyond that pricing diverges from policymakers’ rhetoric, meaning a great deal of focus will fall on their tone and outlook. The euro scraped off a two-week low hit overnight after a survey showed European business activity shrank much more than expected in July, reigniting recession worries. It last bought $1.1070.

The Japanese yen added 0.07% to 141.39 per dollar and investors seem in two minds over whether the Bank of Japan, which sets policy on Friday, might tweak its stance on pinning government bond yields near zero. In the energy market, U.S. crude rose 0.3% to $78.98 per barrel and Brent was at $82.96, also up 0.3% on the day. Spot gold added 0.3% to $1,961 an ounce. U.S. wheat futures hit a five-month high on Tuesday, stretching gains following Russia’s attacks on Ukrainian ports and grain infrastructure that sparked concerns about long-term global supplies and food security.

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Published by the Mercury Team on 25 July 2023