Pound got a lift from rate outlook: Sunak heralds FDI boost

Reuters: The pound got a lift for a third day on Monday and was on track for its largest monthly rise versus the dollar in a year, largely a result of investors ditching the greenback ahead of what many believe will be a rapid shift to U.S. rate cuts in 2024.

FAQ: Payday loans: Are they a good idea?

BRITISH POUND GOT A LIFT

Separately, in a potential longer-term boost for the pound, Prime Minister Rishi Sunak announced a raft of foreign investments in Britain ahead of a gathering of business leaders. The pound has gained nearly 4% versus the dollar this month, but has fared less well against the euro or the Chinese yuan, with declines in November of 0.3% and 3.6%, respectively. On a trade-weighted basis, the pound is heading for its first monthly gain since June. Money market traders expect the Bank of England to keep interests higher for longer than either the Federal Reserve or the European Central Bank in 2024, which has helped give sterling an edge recently.

Less than two weeks ago, traders had priced in around 70 basis points in UK rate cuts next year. Following a number of data releases including business activity and inflation, that expectation has been brought back to around 60 bps. “The developments should help to provide more support for the pound in the near-term in so far as short-term yield spreads are moving back in favour of the UK. However, we remain sceptical that the recent upward adjustment for UK rates will be sustained,” MUFG strategist Lee Hardman said. The pound was last up 0.15% at $1.2624, nearing three-month highs, and was flat against the euro at 86.77 pence.

BoE Governor Andrew Bailey said in an interview published on Monday that getting inflation down to the central bank’s 2% target will be “hard work” as most of its recent fall was due to the unwinding of the jump in energy costs last year. “Governor Andrew Bailey already seems to be playing around with language on forward guidance, where restrictive monetary policy will be retained for an ‘extended period’ or, most recently, ‘for quite some time’,” ING strategist Chris Turner said.

ALSO READ: Who are the richest South Africans in the world today? – 28 November 2023

Meanwhile, Sunak, who is hosting global executives this week outside London in his bid to restore the country as Europe’s top foreign direct investment destination, announced a 29.5 billion pound private-sector investment in Britain on Monday. Years of political churn – with five prime ministers and a non-stop ministerial carousel since the 2016 Brexit vote – have shaken Britain’s reputation for stability among investors. Accountancy firm EY estimates total FDI projects into Britain fell by 6.4% to 929 last year, putting it second in Europe behind France on 1,259. It slipped to third for perceived attractiveness, behind Germany and France.

Britain has changed course on key policies including its rate of corporation tax, its net zero timetable, a major high-speed rail project and its offshore and onshore wind policies. In a note earlier this month, Deutsche Bank head of G10 currency strategy Alan Ruskin laid out the extent to which FDI has declined in Britain. Net FDI flows as a percentage of gross domestic product is running at -3.5% in the UK in the fourth quarter. This isn’t the biggest net outflow among the world’s wealthiest economies – that goes to Sweden with -3.8%. But it is the worst relative to its 10-year average of a net inflow of 1.7%.

This includes Russia, where net FDI flows as a percentage of the pound are averaging -1.2% in the fourth quarter versus a 10-year average of -0.6%, according to Deutsche Bank’s numbers. “Relative to trends over the past two decades, the UK has shifted from a sizable net recipient of FDI to a net exporter,” Ruskin said in a note dated Nov 13. “There is now some persistence to the net FDI deficit over the last three years and weaker FDI project numbers since 2017, that will add to concerns that they relate to Brexit.”

ALSO READ: Who is the richest person in the world today? Top 10 list – 28 November 2023

U.S. DOLLAR

Reuters: The U.S. dollar slid on Monday, on pace for its biggest monthly drop in a year, weighed down by expectations that the Federal Reserve is done hiking interest rates and could start cutting them by the first half of next year. The dollar index, which measures the currency against six major peers, slipped 0.2% to 103.20 and was headed for a monthly loss of more than 3%, its worst performance since November 2022. “Technically, the dollar index did enough damage over the last two weeks to really suggest a breakdown. So the dollar’s heyday is done and we’re now looking at a softer dollar,” said Amo Sahota, director at FX consulting firm Klarity FX in San Francisco. “But we have to be careful here. If you get too aggressive on the softer dollar outlook primarily because you think U.S. rates are going to be cut, the Fed will have something to say about that.”

U.S. rate futures on Monday showed a roughly 23% chance that the Fed may begin easing monetary policy as early as March, according to the CME Group’s FedWatch Tool. That probability rises to about 50% in May. Investors are also looking to a slew of events and data this week that could determine the future path of interest rates globally. A postponed OPEC+ meeting, the release of the Fed’s preferred gauge of inflation – the personal consumption expenditures price index – as well as consumer price data in the euro zone and Australia fill this week’s calendar. The market is also eyeing a rate decision from the Reserve Bank of New Zealand and Chinese purchasing managers’ index data.

In other currencies, the euro was up 0.2% against the dollar at $1.0953. On the month, the euro has gained about 3.6%, on pace for its largest monthly rise in a year. Europe’s single currency showed little reaction to ECB President Christine Lagarde’s remarks saying that euro zone inflation pressures are easing but wage growth is still strong, so the ECB’s fight to contain price growth is not yet done. Against the yen, the dollar fell 0.6% to 148.59 yen. For the month of November, the U.S. currency has fallen about 2%, set for its biggest monthly fall since February.

ALSO READ: Eskom blames HEATWAVE for loadshedding!

The dollar extended losses after data showed U.S. new home sales fell more than expected in October, dropping 5.6% to a seasonally-adjusted annual rate of 679,000 units. September’s sales pace was revised lower to 719,000 units from the previously reported 759,000 units. “I don’t see much potential for a turnaround until later this week when Q3 GDP numbers are released Wednesday morning,” said Helen Given, FX trader, at Monex USA in Washington. “If the U.S. economy can show sustained growth, rather than a sudden sharp downturn as some major economists have predicted, we could see a reversal and some dollar strength to end the month.”

Elsewhere, sterling rose to a more than two-month high of $1.2644, extending its gains from last week following data showing British companies unexpectedly reported a marginal return to growth in November after three months of contraction. The pound was last up 0.2% at $1.2628. The Australian dollar climbed to a more than a three-month high against the greenback of US$0.6614, while the New Zealand currency was up 0.3% at US$0.61 before the RBNZ interest rate decision on Wednesday. The RBNZ is expected to keep its official cash rate unchanged at 5.5%.

In China, the yuan slipped after the official midpoint snapped five straight sessions of strengthening, with the onshore yuan last at 7.1528 per dollar. Its offshore counterpart fell 0.1% to 7.160 per dollar. In cryptocurrencies, bitcoin fell 1.6% to $36,881.

ALSO READ: Payday loans: are they a good idea?

SOUTH AFRICAN RAND

Reuters: The South African rand was stronger on Monday, helped by the dollar falling at the start of a week laden with major global and domestic economic data releases. At 1540 GMT, the rand traded at 18.7150 against the dollar, about 0.5% stronger than its previous close. The dollar index, which measures the currency against six major peers, was down 0.05% after earlier slipping as much as 0.2%. This week’s global focus includes an OPEC+ meeting, the release of the Federal Reserve’s tracked measure of inflation, and consumer prices data in the euro zone and Australia.

Locally, investors will scrutinise trade, budget balance, producer inflation and private sector credit figures for insights about the health of Africa’s most industrialised economy. Like other risk-sensitive currencies, the rand often takes cues from both local and global events. On the Johannesburg Stock Exchange, the blue-chip Top-40 and broader All Share indices closed more than 0.4% lower. The yield on the benchmark 2030 government bond fell 5 basis points to 10.145%.

ALSO READ: Fuel price UPDATE: Petrol and diesel DROP coming NEXT WEEK

GLOBAL MARKETS

Reuters: Asian stocks edged higher on Tuesday, while the dollar was at its lowest in three months as investors remained convinced the Federal Reserve was done with its rate-hike cycle and looked ahead to a crucial inflation report later this week. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.39% higher and set for a near 7% gain in November, its strongest monthly performance since January. Japan’s Nikkei eased 0.20% but is up 8% this month, on course for its strongest monthly performance in three years. “The outlook for central bank policy has been a big factor driving the improvement in risk appetite in November,” said Rodrigo Catril, senior FX strategist at National Australia Bank.

The evidence of an easing inflationary pressures has supported the view that many central banks are done with their tightening cycles and rate cut expectations for next year have been brought forward, Catril said. Markets are pricing in a 96.8% likelihood that the U.S. central bank will leave interest rates unchanged next month, with the possibility of a rate cut starting to gain ground in mid-2024, according to CME’s FedWatch tool. Investors will focus this week on the Fed’s preferred measure of inflation on Thursday and euro zone consumer inflation figures for further clarity on the where inflation is headed.

European Central Bank President Christine Lagarde said on Monday the central bank’s fight to contain price growth is not yet done, citing a still strong wage growth and an uncertain outlook even as inflation pressures in euro zone ease. Fed Chair Jerome Powell is also due to speak on Friday his words will be scrutinized by traders to gauge where rates may head. China’s blue-chip CSI 300 Index was 0.23% lower while Hong Kong’s Hang Seng index fell 0.70%, a day after data showed profit at China’s industrial firms grew at a slower pace in October.

ALSO READ: Newspaper front pages from around the world, 28 November 2023

U.S. data on Monday showed sales of new single-family homes fell more than expected in October, as higher mortgage rates reduced affordability, but the housing segment remains supported by a persistent shortage of existing properties on the market. The weaker-than-expected data weighed on Treasury yields, with the yield on benchmark 10-year notes slipping 9.6 basis points on Monday. In Asian hours, they were up 1.6 basis points at 4.404%. The dollar index, a measure of the greenback against a basket of currencies, fell to 103.11, its lowest since Aug. 31. The Japanese yen strengthened 0.28% to 148.25 per dollar.

Oil prices inched higher on Tuesday after a steep fall the previous day as investors awaited this week’s OPEC+ meeting and expected curbs on supplies into next year. U.S. crude was 0.31% higher at $75.09 per barrel and Brent was back above $80. Spot gold added 0.1% to $2,015.00 an ounce, just shy of the three month high it touched on Monday.