Dollar strengthened after Fed loan survey and the rand slips

Reuters: The dollar strengthened on Monday after a survey from the Federal Reserve showed U.S. banks reported tighter credit standards and weaker loan demand during the second quarter, a sign rising interest rates are having an impact on the economy.

U.S. DOLLAR STRENGTHENED

The Fed’s quarterly Senior Loan Officer Opinion Survey, or SLOOS, which is directed both at businesses and consumers, also showed that banks expect to further tighten standards over the rest of 2023. “Of course, in a higher interest rate environment you’d expect to see a tightening of lending standards and also a softening of demand,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. The dollar index, a measure of the greenback against six major currencies, rose 0.28% after trading little changed earlier in the session.

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The U.S. unemployment report for June on Friday will likely be strong while next week’s Consumer Price Index, also for June, may show the pace of inflation increasing for the first time from a year ago, Chandler said. “Some people think it’s the tip of the iceberg. Gasoline prices are rising,” he said. Friday’s non-farm payrolls will be the first of several data points that will shape a Fed interest rate decision in late September. Before then, central bank leaders will attend the Fed’s Aug. 24-26 symposium in Jackson Hole, Wyoming, where structural shifts in the global economy will be in focus. “We’ll have to see if the data from the U.S. continues to paint a resilient picture of the U.S. economy, and if it does, that can help the dollar at least tread water between now and Jackson Hole,” said Joe Manimbo, senior market analyst at Convera in Washington.

The euro retreated from early gains after data showed economic growth in Europe nudged higher and inflation ticked lower. The euro fell 0.2% to $1.0993. The yen extended losses after the Bank of Japan last week loosened its grip on interest rates, but the currency posted its first monthly gain against the dollar since March. The dollar advanced 0.78% against the yen at 142.250 after a fresh intervention by the BoJ on Monday. The yen went into a tailspin on Friday as traders tried to determine the implications of the BoJ’s move to maintain ultra-low rates while making its bond yield curve control policy more flexible and loosening its defense of a long-term rate cap. The BoJ’s policy of keeping yields pinned down has weighed heavily on the Japanese currency for the past year, and fresh intervention on Monday showed it could continue to do so. Japan’s benchmark 10-year government bond yield surged to a nine-year high, spurring the central bank to conduct additional purchase operations to slow its rise.

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Elsewhere in Asia, data showed China’s manufacturing activity fell for a fourth straight month in July, though the China-exposed Australian dollar and Chinese shares were buoyed by news of further measures to spur the country’s sputtering economic recovery. The Aussie rose 1.05% at $0.6717, and the offshore yuan slipped 0.08% at 7.1433 per dollar, drawing some support from an announcement from China’s State Council on Monday on measures to restore and expand consumption in the automobile, real estate and services sector. The dollar posted its first monthly loss against the yen since March, and its second successive monthly loss against the euro and pound. A key driver of the dollar’s strength may have come to an end with last week’s 25-basis-point hike.

Data on Friday showed that the annual U.S. inflation rate rose in June at its slowest pace in more than two years, with underlying price pressure receding, easing pressure on the Federal Open Market Committee to continue raising rates. The euro earlier rose after data showed euro zone inflation fell further in July, while the bloc returned to growth in the second quarter of 2023 with a greater-than-expected expansion. The euro is eyeing a monthly gain of about 1%. Last week’s European Central Bank policy meeting raised the possibility of a rate pause in September, though Rabobank analysts said Monday’s data “allow the ECB to both argue for a longer hold as well as for another hike”. Sterling fell 0.13% at $1.2833, but notched a 1.0% monthly gain, ahead of the Bank of England’s policy meeting on Thursday. Markets are evenly divided between a 25- and 50-basis-point increase.

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SOUTH AFRICAN RAND

Reuters: The South African rand slipped on Monday after a strong July performance, on the back of weak Chinese manufacturing data that analysts say has put pressure on emerging market currencies. At 1345 GMT, the rand traded at 17.7500 against the dollar, about 0.85% weaker than its previous close on Friday, after falling more than 1% earlier in the day. The dollar last traded at 101.58, around 0.2% stronger against a basket of global currencies. “After a volatile week last week, the rand has been pushed back by underwhelming Chinese manufacturing PMI that has filtered across global markets with the largest impact on commodity linked currencies like the rand,” said DailyFX analyst, Warren Venketas, in a research note.

Like other emerging market currencies, the risk-sensitive rand often takes cues from economic data points coming out of global players such as China and the United States. Despite the losses for the day, the rand has gained more than 5% against the dollar this month. Data released by the South African Revenue Service on Monday showed that the country recorded a 3.52 billion rand ($198.13 million) trade deficit in June. Analysts polled by Reuters had predicted a trade surplus of 11.85 billion rand.

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On the Johannesburg Stock Exchange, the blue-chip Top 40 index was last up around 0.55% from its close on Friday. South Africa’s benchmark 2030 government bond was weaker with the yield up 3 basis points to 10.215%.

BRITISH POUND

Reuters: The British pound was heading for a second straight monthly gain and fourth positive month in five in July as stubborn inflation readings and robust growth data reinforced expectations that the Bank of England has more to do to bring inflation lower. Britain’s central bank is likely to raise its key interest rate for the 14th time in the current tightening cycle on Thursday, but traders and economists are split on the size of the hike. Inflation showing tentative signs of slowing in June has lessened the likelihood of a jumbo rate rise, but with consumer prices still rising at the fastest pace in the G7, markets still expect the BoE will need additional tightening after Thursday to keep inflation down.

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A July 19-24 poll showed 42 of 62 economists surveyed by Reuters expected the BoE to raise the Bank Rate by 25 basis points to 5.25%, while 20 predicted a half-point rise. Money market traders assign around a two-in-three chance of a quarter-point move and one-in-three that the Bank of England opts for a 50 basis point rate rise, while markets still price around 90 basis points of tightening by March next year. “If we get the 25 basis point increase, the pound could weaken,” said Kirstine Kundby-Nielsen, analyst at Danske Bank. The pound was last little changed against the dollar at $1.2856, while the euro last bought 85.85 pence.

In contrast to the BoE, the Federal Reserve and European Central Bank have both laid the groundwork for a pause in their respective tightening cycles at their September meetings as inflation cools. “The market is priced aggressively for further rate hikes from the Bank of England and if that gets dialled down, this will weaken the pound,” Danske Bank’s Kundby-Nielsen said. “But significant further increases could hurt the economy even more. It’s a double-edged sword and I don’t really see a best case scenario for the pound,” Kundby-Nielsen added.

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Meanwhile, data on Monday showed UK lenders approved their highest number of mortgages since October 2022 in June, although at 54,700, approvals are well below the pre-pandemic average of 66,000, according to Capital Economics. “Our view that the Bank will keep rates high until the second half of next year means mortgage rates are likely to plateau rather than fall,” Capital Economics UK economist Ashley Webb said. “That suggests mortgage lending and housing activity will remain weak over the coming months.” Traders meanwhile cut their bets on a continuing rally in the pound by the most since mid-June, data from the U.S. Commodity Futures Trading Commission showed on Friday.

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GLOBAL MARKETS

Reuters: Asian stocks hovered close to a sixteen-month peak on Tuesday and oil held near recent highs as investors found more cause for cheer over global economic prospects than reasons to worry, even as data showed risks remain. The dollar hit a three-week high against the yen as investors continued to seek clarity on the Bank of Japan’s recent adjustment to its yield curve control and what that might mean for monetary policy. The Aussie dollar slumped after the Reserve Bank kept rates unchanged, even as it suggested more tightening may be needed in the future.

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MSCI’s broadest index of Asia-Pacific shares edged slightly higher, inching back toward the high reached Monday, which was its strongest level since April of last year. Japan’s Nikkei provided support, gaining 0.83% on the back of a weaker yen. U.S. E-mini stock futures also pointed to a small rise after the S&P 500 ticked up 0.15% overnight. “We’re in a kind of economic nirvana, with an incredibly resilient economy, solid earnings reports and cooling inflation,” said Tony Sycamore, a markets analyst at IG in Sydney. “A little more than halfway through the year, it feels like we’re in a very good spot.”

Signs of a peaking out in European inflation on Monday echoed the narrative in the United States, providing more evidence that the biggest central banks are nearing the end of their tightening cycles. However, China’s stumbling post-pandemic recovery remained in focus after a surprise contraction in manufacturing in a private-sector survey released Tuesday. Hong Kong’s Hang Seng shed early advance to be about flat, with its property subindex flipping from gains to slide 1.47% as investors took profits after the previous day’s rally, built on stimulus hopes. An index of mainland Chinese blue chips drooped 0.36%. “At this point, we remain sceptical that there will be any big-bang stimulus package forthcoming,” said Alec Jin, investment director of Asian equities at abrdn. “Investors are still waiting to see some meaningful comeback in high frequency indicators.”

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The positive U.S. narrative also faces some crucial tests this week, with several closely watched jobs reports due, culminating with monthly payrolls on Friday. Corporate earnings later in the day include global bellwether Caterpillar. In currencies, the U.S. dollar index – which measures the currency against six major peers – rose as high as 102.07 for the first time since July 10. That was aided by a continued retreat in the yen to a three-week low of 142.84 per dollar , as investors looked past the BOJ’s surprise tweak of its 10-year yield ceiling to view changes to the negative short-term rate as a still distant prospect. A closely watched auction of 10-year notes saw relatively weak demand, although the yield reacted little, sticking around 0.6%, well back from the new de facto cap at 1%.

The Aussie weakened as much as 0.9% to $0.66575 after the RBA opted to keep policy steady for a second meeting running. Markets had priced 70% odds for no action, and 30% probability of a hike. “It’s unsurprising that the knee-jerk reaction is negative, but I wouldn’t expect it to be onwards and downwards for Aussie,” said Ray Attrill, head of FX strategy at National Australia Bank, who predicts a recovery toward $0.70 in coming weeks if risk sentiment stays positive. “On a valuation basis, Aussie is looking pretty cheap.”

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Oil prices were little changed on Tuesday, trading near a three-month high reached on Monday, on signs of tightening global supply, as producers implement output cuts, and strong demand in the United States, the world’s biggest fuel consumer. Brent crude futures for October were down 0.2% or 18 cents at $85.25 a barrel. Front-month Brent settled at its highest since April 13 on Monday. U.S. West Texas Intermediate crude was at $81.64 a barrel, down 0.2% or 16 cents from the previous session’s settlement, which was its highest since April 14.

Published by the Mercury Team on 1 August 2023