Dollar licked its wounds ahead of Fed Chair Powell’s remarks

Reuters: The U.S. dollar licked its wounds and regained its footing on Wednesday and inched higher after a slew of Federal Reserve speakers left the door open to further rate hikes, as traders looked to a speech from Chair Jerome Powell on the central bank’s future policy path.

U.S. DOLLAR LICKED ITS WOUNDS

The greenback, which tumbled last week in the wake of the Fed’s decision to hold its policy rate steady and on data pointing to a cooling U.S. labour market, has found a floor as markets remain at odds over whether a peak in U.S. rates has been reached and how soon the Fed could begin easing monetary conditions. Futures point to a roughly 15% chance of another hike by January, but are pricing in a 22% chance that rate cuts could come as early as March, according to the CME FedWatch tool.

The British pound, which earlier in the week hit a seven-week top against the dollar, was last some distance away at $1.2286. The Japanese yen again slipped to the weaker side of 150 per dollar after a slight reprieve last week. It last stood at 150.56 per dollar. The U.S. dollar index, which last week clocked its sharpest weekly fall in about four months, rose 0.03% to 105.57 and was on track for a weekly gain. “We’ve seen a slight recovery in the U.S. dollar, but this is to be expected following such a sharp selloff,” said Matt Simpson, senior market analyst at City Index. “We’re also seeing the obligatory hawkish pushback from Fed speakers this week, as they try to steer market expectations away from rate cuts.”

ALSO READ: Who is the richest person in the world today? Top 10 list – 8 November 2023

A slew of Fed policymakers on Tuesday maintained a balanced tone and said they are weighing strong economic data, some signs of a slowdown, and the impact of higher long-term bond yields as they consider if they will need to hike rates further to bring down inflation. Focus now turns to a speech by Fed Chair Powell later on Wednesday. “There’s risk we could see further U.S. dollar strength today assuming Powell and company continue to remind markets of their ‘higher for longer’ narrative,” said Simpson.

The euro fell 0.07% to $1.0691, further weighed by a darkening growth outlook in the euro zone. Data on Tuesday showed German industrial production fell more than expected in September. “The mixed outlook for consumer and investment spending leaves the euro zone very close to recession,” said Wells Fargo economist Nick Bennenbroek. “Regardless of whether the euro zone falls into recession, we see enough growth headwinds to suggest that the European Central Bank’s monetary tightening is done.”

Down Under, the Australian dollar struggled at $0.6425, having slid 0.8% in the previous session – its largest daily decline in about a month. The Reserve Bank of Australia on Tuesday raised interest rates to a 12-year high, ending four months of steady policy, but watered down its tightening bias to make it more conditional on incoming data. “We do not expect that the RBA will follow up with another rate increase in December,” said Westpac’s chief economist Luci Ellis. “The last paragraph of the statement contained a shift in language. This reads as the board hoping not to have to raise rates again, but being very willing to do so if things change. There is not enough new information between now and the December meeting to drive a change in view.” The New Zealand dollar likewise fell 0.12% to $0.5928.

ALSO READ: Who are the richest South Africans in the world today? – 8 November 2023

BRITISH POUND

Reuters: Sterling dropped against a strengthening U.S. dollar on Tuesday, with investors closely watching economic data and market bets on the Bank of England’s future moves. Higher yields and a strong economy usually increase demand for the nation’s currency. The pound rose more than 2% versus the greenback last week, its biggest gain in almost four months, after the BoE held interest rates at a 15-year high and stressed the need to continue fighting inflation, while U.S. yields and the greenback tumbled after the Fed suggested its tightening path was over. Money markets priced in more than a 50% chance of rates being unchanged until June 2024 and a higher chance of a 25 basis points rate cut in August next year.

The Bank of England might wait until the middle of next year before cutting interest rates from their current 15-year high, the BoE’s Chief Economist Huw Pill said on Monday. “We think these comments are a mild sterling negative, and given the risk that Fed-speak puts equities on the back foot again, risk-sensitive sterling could hand back some of its recent gains,” said Chris Turner, head of forex strategy at ING. The dollar advanced on Tuesday as last week’s rally in riskier currencies took a breather. Sterling was last down 0.15% at $1.2320. It hit $1.2428 on Monday, its highest in more than a month.

“Markets expect the BoE to lower rates in 2024, but starting a bit later than the Fed and probably acting with less intensity,” said Roberto Mialich, global forex strategist at Unicredit, adding that the U.S. curve of policy rate forwards is leading the whole foreign exchange market. Investors remain on hold ahead of Friday’s economic data, including gross domestic product, the balance of trade and industrial production. “Come Friday, there is a raft of UK activity indicators released, which should paint a familiar message. UK growth is anaemic, and GBP does not warrant being in a stronger position,” said Paul Mackel, global head of forex Research at HSBC.

British consumer spending grew at the slowest pace in more than a year last month, reflecting concerns about the cost of living in the run-up to Christmas, according to a survey released on Tuesday. Sterling was roughly unchanged against the euro, with the single currency down 0.01% at 86.81 pence.

ALSO READ: Rand Report: The Rand comes roaring back

SOUTH AFRICAN RAND

Reuters: South Africa’s rand continued to give back some of last week’s gains on Tuesday as the U.S. dollar traded higher. At 17:05 GMT, the rand traded at 18.3575 against the dollar, about 0.4% weaker than its previous close. The dollar was last up more than 0.3% against a basket of major currencies. The South African currency, susceptible to changes in global factors, rallied last week on hopes the U.S. Federal Reserve has reached the end of its policy tightening cycle following a pause in interest rate hikes.

“Things have taken a drastic turn as if the market interpreted this as the end of interest rate increases,” Casparus Treurnicht, portfolio manager at Gryphon Asset Management, told Reuters. “Then the Australian central bank hiked their rates with 25 basis points this morning – surprising all those that believed in this newfound optimism,” he added. Federal Reserve Chairman Jerome Powell is due to speak on Wednesday and Thursday, where the focus will be on whether he maintains the more dovish tone struck after last week’s policy meeting.

Investors will also be closely watching South Africa’s September mining production and manufacturing figures for clues on the health of the local economy. Both the blue-chip Top 40 index and the benchmark all-share index closed more than 2% lower, led by a drop of over 4% in the resources index. South Africa’s benchmark 2030 government bond was almost unchanged in late deals, with the yield at 10.400%.

ALSO READ: What Is the Role of Blockchain in the Financial Sector? 

GLOBAL MARKETS

Reuters: Treasury yields and the dollar hovered above multi-week lows on Wednesday as markets grappled with the possibility of another U.S. interest rate hike while waiting on comments from Federal Reserve Chair Jerome Powell for a steer on the policy outlook. Crude oil sank to a three-month low after data showed a steep build in U.S. stockpiles, while worries about the Chinese economy weighed on the outlook for demand. Equities were mixed in Asia, with gains for tech stocks offset by slumping commodity shares. Wall Street futures pointed slightly lower following gains across the big three indexes overnight, led by a 0.9% rally for the tech-heavy Nasdaq.

Expectations have been building in recent days that U.S. policy rates have peaked and cuts could begin as early as May, following a softening in key monthly jobs data at the end of last week and a tempering in the Fed’s hawkish stance. However, investors remain sensitive to the possibility of more hikes amid guarded remarks from Fed officials. Fed Governor Christopher Waller said on Tuesday that the economy bears watching after “blowout” third-quarter GDP figures, while fellow governor Michelle Bowman said she still expects higher rates will be needed. Powell speaks on Wednesday and Thursday.

ALSO READ: Newspaper front pages from around the world, 8 November 2023

U.S. 10-year Treasury yields were little changed at 4.5789%, finding a floor after dipping as low as 4.484% on Friday for the first time since Sept. 26. They reached a 16-year high of 5.021% last month. The dollar index, which measures the currency against six major peers, was largely flat at 105.55, above the more than six-week low of 104.84 reached on Monday, but well back from the high at the start of this month at 107.11. “The markets are repositioning for a moderation in U.S. growth,” pushing down long-term yields and the dollar, said Kyle Rodda, a senior markets analyst at Capital.com.

“The drop in oil prices is delivering a similar signal,” he added. “The sell-off is coming on demand fears: There’s a lot of fear about China’s recovery in that, but also that after exceptional resilience, the U.S. economy is slowing.” Brent crude futures dropped 25 cents to $81.36 a barrel on Wednesday, while U.S. crude futures fell 35 cents to $77.02 a barrel. Both declined to the lowest since July 24 in early Asia trade. Declines in commodity shares amid lower energy prices were offset by a climb in growth stocks, amid expectations for lower borrowing costs.

A case in point was Japan’s tech-heavy Nikkei 225, which rose 0.13% while the broader Topix sank 0.66%. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.3%, aided by gains for Chinese markets after some bullish comments from the People’s Bank of China governor. Hong Kong’s Hang Seng rose 0.22%, while an index of mainland blue chips added 0.1%.

ALSO READ: EFF didn’t pay AfriForum R320 000?

Published by the Mercury Team on 8 November 2023