Dollar weakened as dovish Fed speak dials down rate expectations

Reuters: The dollar weakened on Tuesday along with U.S. interest rate expectations and a fall in Treasury yields as investors detected a slight dovish shift in Federal Reserve officials’ tone.

FAQ: Could the Rand hit R25 to the Dollar?

U.S. DOLLAR WEAKENED

The yen held small gains as violence in the Middle East supported buying of safe-haven assets, and last traded firmly at 148.34 per dollar. The Swiss franc has also gained and was edging higher at 0.9045 to the dollar. The euro was up 0.1% in early Asia trade to $1.0580. The Israeli shekel steadied at 3.95 to the dollar, just off an almost eight-year low, after the central bank promised $30 billion in foreign exchange selling.

Investors are bracing for a drawn-out conflict after a weekend attack from Palestinian militants – and Israel’s retaliation – has claimed more than 1,500 lives. However comments from two Fed officials turned around the mood and U.S. rate forecasts overnight after noting the recent selloff in bonds might negate the need for further hikes. “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the Fed funds rate,” said Dallas Fed president Lorie Logan — a notable shift from previously hawkish rhetoric.

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Fed Vice Chair Philip Jefferson said the central bank would need to “proceed carefully” given the recent rise in yields. Futures-implied pricing for the chance of another Fed hike this year fell from above 40% last week to about 26% on Monday. “A handful of other officials, including Fed Governor Christopher Waller, are scheduled to speak today. Markets will closely watch their comments for further clues on the path of Fed policy,” said CBA strategist Carol Kong in a note.

Ten-year Treasury yields, which have been zooming, dived more than 13 basis points to 4.63% at the open in Tokyo on Tuesday on both rates relief and a safe-haven bet after the cash market had shut for Columbus Day on Monday. Sterling was a fraction firmer against the dollar at $1.2244. Against the Australian and New Zealand dollars the greenback was also a fraction weaker, with the Aussie up 0.2% to $0.6420 and the kiwi up 0.2% to $0.6031.

China’s return from a week’s break has traders’ eyes back focused on the daily fix of the yuan’s trading band, which has for weeks on end been far firmer than market expectations. Ahead of the onshore open, the yuan held overnight gains to trade just above its 50-day moving average in the offshore market at 7.2876 per dollar.

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BRITISH POUND

Reuters: Sterling fell against a strengthening dollar on Monday but was still within striking distance of last week’s 1-1/2 week high as recent economic data provided some reason for optimism about the UK’s economic outlook. The safe-haven dollar rose as increased violence in the Middle East spooked markets, after a blowout U.S. jobs report gave the currency a leg up. Sterling was down 0.4% at $1.2180 after touching its highest level since Sept. 29 on Friday.

Two days earlier, on Wednesday, the pound had retreated to $1.2038, its lowest since mid-March. A weaker outlook in the UK combined with the resilience of the U.S. economy weighed on sterling, amid expectations the Federal Reserve will hike interest rates again while the Bank of England’s path is more uncertain.

“We keep forecasting no further rate hikes by the BoE, but data and events scheduled this week in the UK might affect market expectations,” said Roberto Mialich, global forex strategist at Unicredit. He pointed to the BoE Financial Policy Committee Summary and Record to be published on Tuesday and gross domestic product data on Thursday. Some analysts argued that last week’s economic figures from the UK have provided some grounds for optimism.

The final reading of the S&P Global UK Services Purchasing Managers’ Index hit an 8-month low but was better than a preliminary “flash” reading of 47.2. Investors see little chance of another BoE rate hike at the next policy meeting in November, but they are pencilling in one more rate increase in 2024. Money markets price in a 25% chance of a BoE move in November, but the chances rise to 40% in December and 50% in February.

The Bank of England Credit Conditions Survey, due on Thursday, will be crucial for understanding the strength of household consumption and business investment going forward, said Sanjay Raja, senior economist at Deutsche Bank. Raja forecast sluggish figures but argued that households and businesses have been running down their savings in lieu of borrowing. “As such, adjusting for deposit flows, our estimate of the credit impulse sits at a positive 2.9% of GDP.” The pound was flat against the euro at 86.44 pence per euro.

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SOUTH AFRICAN RAND

Reuters: The South African rand weakened on Monday as violence in the Middle East stoked risk aversion in global markets while traders awaited release of the national census due this week. At 1510 GMT, the rand traded at 19.4100 against the dollar, more than 0.6% weaker than its Friday close. “Trade in the rand will likely remain cautious as markets wait to see how the Middle East situation develops,” said TreasuryONE currency strategist Andre Cilliers. The U.S. dollar strengthened against a basket of global currencies as clashes escalated between Israeli forces and Palestinian militant group Hamas, sending investors scurrying towards the safety of the greenback.

“While South Africa is geographically far removed from the Israel/Gaza conflict, it is not deemed to have shown complete neutrality towards the Russian/Ukraine war and concerns exist that this may be repeated, which would undermine the rand further,” Investec economist Annabel Bishop said in a research note.

It is expected to give a comprehensive analysis of the economy that will help improve planning and development in Africa’s most industrialised economy. Market focus will be on the data for clues on the South African economy and the country’s struggle with high unemployment. The Johannesburg Stock Exchange held its ground, with the blue-chip Top-40 index closing flat. South Africa’s benchmark 2030 government bond was weaker, with the yield up 4 basis points at 10.930%.

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GLOBAL MARKETS

Reuters: Asian shares rose on Tuesday in line with Wall Street’s high note and bonds also rallied, boosted by dovish Federal Reserve remarks, while oil prices edged down after Monday’s surge with the market remaining focused on the conflict in the Middle East. MSCI’s gauge of Asia Pacific stocks outside Japan was up 1.2% at 0135 GMT. Japan’s benchmark Nikkei average rose 2.4% while Australia’s S&P/ASX 200 rose for a fourth straight session to gain 1.2%.

Top Fed officials indicated on Monday that rising Treasury yields could steer the Fed from further rate increases, helping to spur a rise in bond prices after those markets had been closed the previous day in the U.S. and Tokyo. Markets were keeping a close watch, however, on military clashes between Israel and the Palestinian Islamist group Hamas, after Hamas’ surprise strike on Saturday that killed hundreds of Israelis.

The Israeli military has since said it called up an unprecedented 300,000 reservists and was imposing a total blockade on the Gaza Strip, raising expectations of a possible ground assault. “It’s pretty early days to assess the meaningful impact of what’s happening in the Middle East and what it actually means for markets,” said Kerry Craig, a global market strategist at JPMorgan Asset Management.

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“If it takes a drawn-out time and we get more actors involved in it, obviously there’s going to be a bigger market impact from that.” The Hang Seng Index and China’s benchmark CSI300 Index opened up 1.2% and 0.5%, respectively. China’s largest private property developer Country Garden Holdings warned on Tuesday morning that it might not be able to meet all of its offshore payment obligations when due or within the relevant grace periods, weighing on the country’s beleaguered property sector.

U.S. stocks ended higher on Monday, with energy shares rising along with oil prices. The S&P 500 energy index ended up 3.5%. The markets’ initial reaction to the major geopolitical developments in the Middle East was a bout of risk aversion, analysts from National Bank of Australia said in a note. “That said, it is interesting to note that the magnitude of the moves has been relatively contained and, in many instances, not all the moves have been sustained,” they said.

Oil prices eased after climbing more than 4% on Monday. Brent crude fell 0.4%, to $87.75 a barrel as of 0136 GMT, while U.S. West Texas Intermediate crude eased 16 cents or 0.5% to $85.93 a barrel. Spot gold gained 2% to $1,864.69 per ounce, after scaling a one-week high on Monday as investors sought safe havens. The dollar softened on Tuesday along with U.S. interest rate expectations. Ten-year Treasury yields, which have been surging, fell more than 13 basis points to 4.6% at the open in Tokyo as bond prices rallied after Monday’s holiday.

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Published by the Mercury Team on 10 October 2023

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