Dollar retreated after mixed batch of data: Yen modestly firmer

Reuters: The U.S. dollar retreated on Wednesday, tracking the pullback in U.S. Treasury yields, amid a mixed set of data suggesting that there are pockets of weakness in the world’s largest economy, further diminishing the odds of another interest rate hike by the Federal Reserve before the end of the year.

U.S. DOLLAR RETREATED

The yen, on the other hand, was slightly firmer against the greenback, moving away from the closely watched 150-per dollar mark, as a short-lived surge in the previous session stoked speculation that Japanese authorities may have intervened to support the currency.

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The dollar index, which tracks the greenback against six peers, was down 0.3% at 106.69, giving up some of its recent gains, after weaker-than-expected U.S. private payrolls based on the ADP National Employment Report. The index, however, remained within striking distance of a nearly 11-month high of 107.34 reached in the previous session. The dollar did retrace some of its losses after U.S. factory orders gained 1.2% in August, compared with expectations of a 0.2% rise. That more than offset the moderate decline in a U.S. services sector index last month.

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“This morning’s services sector data helped soften expectations ahead of Friday’s non-farm payrolls report, and we’ve seen a slight pullback in odds on another rate hike from the Federal Reserve before year-end,” said Karl Schamotta, chief market strategist, at Corpay in Toronto. “More broadly, the surge in Treasury yields, and the corresponding dollar rally, seems to be reaching exhaustion.” The Japanese currency was last flat on the data at 149.04 per dollar, after unexpectedly surging nearly 2% at one point on Tuesday to 147.30, its strongest in three weeks. The spike came after it slipped to 150.165 per dollar, its weakest since October 2022.

“Dollar/yen is now trading pretty close to levels we saw just three sessions ago, which tells me yesterday’s move was not, in fact, an intervention,” said Helen Given, FX trader, at Monex USA in Washington. “I see an overwrought market reaction to touching that psychological 150 figure.” Japan’s top currency diplomat, Masato Kanda, said he would not comment on whether Tokyo intervened in the exchange rate on Tuesday, although he said, “We have only taken steps that have the understanding of U.S. authorities.”

The Bank of Japan’s money market data, however, showed on Wednesday Japan likely did not intervene in the currency market a day earlier. Japanese authorities last year intervened to prop up the yen for the first time since 1998. The currency has slumped around 12% against the dollar this year as U.S. bond yields have risen sharply compared to their Japanese peers as the Fed has hiked interest rates. On Wednesday, longer-dated Treasury yields eased from 16-year highs, after 30-year yields briefly rose above 5% overnight.

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Elsewhere, the euro rose 0.5% to $1.0515, not that far from Tuesday’s low of $1.0448, its weakest since December, triggering talk of a fall back to $1. It rose even as data showed euro zone retail sales fell much more than expected in August and that the bloc’s economy probably shrank last quarter. Sterling climbed 0.6% to $1.2149, rebounding after falling to a nearly seven-month low of $1.2038. The New Zealand dollar fell after its central bank held the cash rate steady at 5.5%, as policymakers grew more confident past hikes were working to bring down inflation. That sent the New Zealand unit sliding to a nearly one-month low of US$0.5871. It last traded up 0.2% at US$0.5916.

BRITISH POUND

Reuters: The pound rose against the dollar for the first time in almost a week on Wednesday, in line with a retreat in the U.S. currency, and after a survey showed UK business activity was less subdued than initially feared in September. The final reading of S&P Global UK Services Purchasing Managers’ Index fell in September to 49.3 from 49.5 in August, further below the 50 threshold for growth. The reading was an eight-month low, but it topped a preliminary reading of 47.2 that shocked investors earlier in September.

The final PMI included responses from companies surveyed from Sept. 20 to Sept. 27 – days after data showed British inflation fell unexpectedly in August, as well as the Bank of England’s surprise decision to leave interest rates unchanged on Sept. 21. Sterling was last up 0.4% on the day against the dollar at $1.2123, having fallen for the last three trading days, although the rise in U.S. government bond yields meant this strength could be short lived. The pound gained 0.1% against the euro to trade at 86.63 pence, but remained in sight of late September’s four-month lows around 87 pence.

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“With inflation cooling and concerns rising over a prolonged economic slowdown, the market is convinced that the BoE has reached the end of its hiking cycle, which is keeping pressure on the pound,” City Index market strategist Fiona Cincotta said. Money market traders believe there is a 22% chance of another rate hike from the BoE this year, but this would likely be the last increase for this monetary policy cycle. Just three months ago, traders expected UK rates to peak above 6% around the middle of next year.

One of the reasons the dollar has proven so resilient in recent weeks is the expectation that U.S. interest rates could rise at least once more this year and remain higher for longer than those in the UK. “Buyers will need a close back above $1.22 to indicate that a low could be in place in the short term. This is where Friday’s bounce stalled as selling pressure revived,” said IG chief market analyst Chris Beauchamp.

Against the yen, the pound rose 0.3%, moving clear of Tuesday’s 10-week lows. The yen hit its lowest in a year against the dollar on Tuesday, before staging a sudden rally after having weakened past 150 per dollar – widely believed to be a level at which Japanese monetary authorities might intervene to shore up the currency. A number of currency watchers said the turnaround in the yen on Tuesday was reminiscent of intervention, but that official buying was highly unlikely to be the driving force given the Ministry of Finance and the Bank of Japan’s focus on volatility, rather than outright trading levels.

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SOUTH AFRICAN RAND

Reuters: The South African rand traded slightly higher on Wednesday following several days of weakness as the softening of the U.S. dollar supported risk sentiment. At 1619 GMT, the rand traded at 19.2800 against the dollar, about 0.3% stronger than its previous close. The dollar index, which tracks the greenback against six peers,was last down around 0.4%. The rand has been on a downward trajectory this week, tumbling against a buoyant dollar on both Monday and Tuesday to sit around 2% weaker since the start of the month.

The S&P Global South Africa PMI survey showed on Wednesday that activity in the private sector held steady in September as firms scaled back output somewhat due to rolling power cuts and cost pressures but took on more staff. Local retailers Woolworths and Pick n Pay warned they were limiting the amount of eggs that shoppers can buy as the country’s worst outbreak of avian flu hit supplies. The CEO of Sibanye Stillwater, South Africa’s biggest mining sector employer, said the firm may be forced to close some loss-making shafts, adding job cuts in platinum mining had become inevitable as prices of precious metals fall.

On the Johannesburg stock market, the Top-40 and the broader all-share indices ended almost 0.3% lower. South Africa’s benchmark 2030 government bond was weaker in afternoon deals, with the yield up 6.5 basis points to 11.085%.

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GLOBAL MARKETS

Reuters: Asian shares rebounded from 11-month lows on Thursday as a plunge in oil prices and softer U.S. labour data helped pull Treasury yields off 16-year peaks, although a looming U.S. payrolls report could make or break the rally. Tracking overnight gains on Wall Street, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.6%. Japan’s Nikkei climbed 1.2%. Hong Kong’s Hang Seng index advanced 0.3%. China’s mainland markets remain closed for holidays. Overnight, the rout in Treasuries took a breather after a cooler-than-expected U.S. private payrolls report and a 5% drop in oil prices offered some comfort to investors. Risk sentiment has taken a beating on the view that interest rates will stay high for longer.

Ten-year yields eased 2 basis points to 4.7163% on Thursday, continuing their overnight retreat from a fresh 16-year high of 4.8840%. Much will depend on U.S. non-farm payrolls data on Friday. Economists expect 170,000 jobs created in September, slowing from 187,000 in August, while the jobless rate likely ticked lower to 3.7% from 3.8%. “I think those numbers will have to be a long way from those expectations for it to move the dial for the Fed, but numbers close to the expectations might serve to calm jitters in the Treasury market,” said Stephen Miller, an investment strategist at GSFM, a Sydney-based fund.

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“Given where Treasury yields are at the moment, I think the risks are pretty evenly balanced between them on the downside and on the upside.” The recent spike in yields has meant they have reached levels where, if sustained, would see a significant tightening in financial conditions, bolstering the case for no further hikes from the Fed. The CME FedTool now prices in a 23% chance of a hike in November, compared with 28% a day ago. The U.S. dollar came off highs and Wall Street rebounded, led by the tech heavy Nasdaq which rose more than 1% overnight.

The battered yen also got a much needed reprieve, rallying 0.5% on Thursday to 148.34 per dollar. Traders are continuing to wonder whether a sharp rebound away from the 150 level on Tuesday was due to intervention from Japanese authorities. “Whether or not the BoJ intervened, we still judge the risk of intervention is high while USD/JPY follows U.S. Treasury yields higher,” said Joseph Capurso, head of international economics at CBA. Despite the renewed strength for the U.S. dollar, analysts still see weakness for it ahead, a Reuters poll showed.

Oil prices gained on Thursday after losing a colossal 5% to where they were at the beginning of the year. Brent crude futures rose 0.3% to $86.10 per barrel and U.S. West Texas Intermediate crude futures were also up 0.3% at $84.45. The price of gold gained 0.3% to $1,826.69 per ounce.

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Published by the Mercury Team on 5 October 2023

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