Dollar pushed lower as South African rand grows stronger

Reuters: A sliding dollar was pushed lower still in Asia on Thursday, as traders took surprisingly slow U.S. inflation as a signal U.S. interest rate rises will be all but finished by month’s end.

SLIDING DOLLAR WAS PUSHED LOWER

The dollar has been steadily slipping for about six weeks, but had its worst session in five months on Thursday – falling more than 1% against the euro to its lowest in more than a year – as the U.S. inflation slowdown gave dollar sellers confidence. The euro made a fresh 15-month high of $1.1148 in Asia on Friday and the yen touched its strongest since mid-May at 138.08 per dollar. The U.S. dollar index fell marginally to 100.42, its lowest since April 2022.

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U.S. core inflation came in at 0.2% in June against market expectations for 0.3%. Headline annual CPI fell to 3% and has been dropping since hitting a peak at 9.6% a year earlier. Interest rate futures showed markets have fully priced a Federal Reserve rate hike later this month, but expectations of any further increases are being wound back. “The view is that the Fed will very likely hike at the end of July and that will be the last one,” said Westpac strategist Imre Speizer. The New Zealand dollar rose 0.5% to a two-month high of $0.6332 and the Aussie was up 0.4% to a three-week peak at $0.6813.

Moves in other currencies were smaller but still delivered new milestones as traders reckon the dollar has further to drop. The Swiss franc hit its strongest since 2015 at 0.8655 to the dollar and sterling a 15-month top of $1.3019. The Chinese yuan steadied near a one-month high at 7.1675 per dollar, held back by weak trade data that showed exports diving at their fastest pace for three years. Emerging market currencies also rallied across Asia, led by Malaysia’s ringgit which jumped 1% and through to the strong side of 4.6 per dollar. Thailand’s baht held small gains while traders waited to see whether prime ministerial hopeful Pita Limjaroenrat could command a majority in parliament.

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In Scandinavia, where inflation is looking sticky and central bankers are projecting further rate hikes, currencies tacked extra gains to Thursday’s surges for the Swedish and Norwegian crowns to eye weekly gains of 5%. “We think the recent dollar underperformance reflects a qualitative shift in market comfort with being short dollars as the terminal Fed policy rate looks increasingly capped,” said currency analyst Steve Englander at Standard Chartered. Two-year Treasuries, which track rate expectations, extended an overnight rally driving yields down 4 basis points to 4.71%.

Amongst the dollar selling, one outlier was perhaps the yen which has led gains. It is up more than 4% in five sessions, but paused in Asia as the focus turned to whether the Bank of Japan might soon tweak its yield control policy. The closely-watched 10-year yield fell slightly to 0.46% on Thursday, comfortably below the BOJ’s 0.5% cap, suggesting only modest speculation of a policy shift as the possibility of easing inflation reduces some of the pressure. “Governor Kazuo Ueda has maintained, thus far, that the risks of moving too early outweigh the risks of moving too late,” said DBS strategist Chang Wei Liang. “Certainly, the Fed entering the tail-phase of rate hikes provides relief and allows the BOJ to normalise policy at their own desired pace.” European Central Bank meeting minutes, European industrial production data and British monthly GDP are ahead on Thursday.

SOUTH AFRICAN RAND

Reuters: The South African rand extended gains against the dollar on Wednesday after inflation in the U.S. slowed in June, boosting hopes interest rates might not be hiked several times this year. At 1503 GMT, the rand was up over 1.6% against the dollar to 18.1925, its highest level in a month. U.S. consumer prices rose to 3% in June, lower than market expectations of a 3.1% increase, signalling to investors that the U.S. Federal Reserve may be nearing the end of its tightening cycle.

Although the Fed has said rates could be hiked in its next meeting, investors are betting on just one single hike before it pauses, a move which could gradually spark economic activity. “We are seeing strength come in on the emerging market currencies including commodity based currencies of which the rand is both,” said Shaun Murison, senior market analyst at IG. The dollar last traded around 0.75% weaker against a basket of global currencies. The main board of the Johannesburg Stock Exchange was up 1.99% to 76,367 points, while the benchmark top 40 rose above 2.1% to 70,991.

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The resources index rose by 3.1%, driven by platinum group metal’s miners, Northam Platinum and Anglo American platinum. Greg Davies, head of wealth at asset manager Cratos Capital, added that the weakness in the dollar boosted metals prices while the prospect of slower rate hikes had a positive impact overall on the local bourse. South Africa’s benchmark 2030 government bond firmed further, with the yield down 2.1 basis points to 10.515%.

BRITISH POUND

Reuters: Sterling touched a fresh 15-month high on Wednesday after a Bank of England banking system stress test showed Britain’s largest lenders have enough capital to ride out a potential economic crisis, firming bets for more BoE rate hikes ahead. The test showed Britain’s eight biggest banks had enough capital to weather theoretical shocks under a scenario which the BoE said was more severe than the global financial turmoil of 2008 when British taxpayers had to bail out several lenders. The test also measured how well the lenders would cope with a global rise in interest rates. “The UK economy and financial system have so far been resilient to interest rate risk,” BoE Governor Andrew Bailey said, though he noted the full impact of higher interest rates had yet to be felt.

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The Bank last month raised rates to 5% as it tries to tame stubborn inflation, but the surging cost of borrowing has raised concerns about a hit to households, businesses and the broader financial sector that could push the economy into a recession. “Headlines suggest large banks have passed stress tests while smaller lenders and shadow banks remain a concern, though UK households with high debt will remain below their peak of 2007. At first glance, there seems nothing here to urgently constrain the BoE’s monetary tightening plans,” said Chris Turner, head of markets at ING. Money markets are pricing in that the BoE’s benchmark rate will peak at 6.3% in March 2024. The stress test result added to UK wage growth data on Tuesday which fed expectations the BoE has further to go in raising rates.

A key measure of British wages rose in the three months to May at the joint fastest pace on record, but there were signs that the inflationary heat in the labour market was cooling. Bailey said on Wednesday that the latest jobs data pointed to signs of a cooling labour market, even if wage growth remains too high for the BoE’s liking. The pound rose as high as $1.2970, its highest since April 2022, and was last trading just shy of that level, flat on the day at $1.2923. Against the euro, sterling was down 0.2% at 85.28 pence, after hitting on Tuesday its strongest since August 2022.

GLOBAL MARKETS

Reuters: Asian shares and bonds rallied on Thursday while the dollar nursed heavy losses, as a surprisingly low reading on U.S. inflation reinforced bets the end of the post-pandemic tightening cycle is in sight. The buoyancy is set to extend to Europe when markets there open, with EUROSTOXX 50 futures gaining 0.2%. S&P 500 futures rose 0.2% while Nasdaq futures advanced 0.4%. Investors also shook off dismal China trade data, which showed both exports and imports contracted at worse-than-expected pace, suggesting the world’s second-largest economy is continuing to lose momentum.

MSCI’s broadest index of Asia-Pacific shares outside Japan surged 1.8%, bolstered by a 2.5% jump in Hong Kong’s Hang Seng index and a 1.6% gain in Australia’s resources-heavy shares. Japan’s Nikkei also rose 1.4%. Chinese tech giants listed in Hong Kong rallied 3.4% after Premier Li Qiang urged the companies to support a slowing economy, adding to signs that a years-long crackdown on the sector is over. Overnight, the much-watched U.S. consumer inflation report provided better news than markets had hoped for. The Consumer Price Index rose 3% in June from a year ago, below expectations for a gain of 3.1% and a world of difference from 9.1% in the same month last year.

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In particular, core inflation, which the Fed has feared to be sticky, also showed a sharper-than-expected slowdown. “With the usual caveat of one month not making a trend, the narrow path to a soft landing looks a smidgeon wider this morning,” said Michael Feroli, chief U.S. economist at JPMorgan. “There may be a few doves on the FOMC who would be willing to see how far this process can run without additional tightening, but we expect that the Fed leadership is still strongly inclined to hike in two weeks before the Committee goes on extended pause.” Indeed, futures still imply a 94% probability of a quarter-point hike from the Fed later this month, but have pared back the risk of another hike in September to 13.2%, from 22.3% a day earlier, according to CME FedWatch Tool.

Futures also moved to imply an earlier first rate cut, in March next year, and were pricing in a total of 125 basis points in cuts in 2024. Bonds heaved a sigh of relief after a rout last week sent global yields sharply higher. The 10-year Treasury yield was at 3.8535% in Asia, having dived 12 basis points overnight and down from a seven-month top of 4.0940% on Friday. Rate-sensitive two-year yields were little changed at 4.7272% in Asia, after plunging 15 bps overnight. That led to a steepening in the yield curve. The U.S. dollar slumped to a fresh 15-month low against its major peers, taking off pressure on emerging market currencies and giving Asian policymakers more scope to ease monetary policy.

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The euro rose 0.2% to a 15-month top of $1.1144 on Thursday, after surging 1.1% overnight on bets of a more hawkish European Central Bank now that Fed is expected to be almost done hiking. The Japanese yen, which had come under massive selling pressure due to Japan’s ultra easy monetary stance, gained more than 6 yen on the dollar in nine sessions and was last at 138.43 per dollar. “The Fed’s leadership in the global rate cycle will increasingly play against the dollar, as central banks pivot from rate hiking to rate cutting,” said Alan Ruskin, chief international strategist at Deutsche Bank.

In Canada, risks remain tilted towards more tightening. The Bank of Canada on Wednesday raised rates by a quarter-point to 5%, and the governor did not shy away from saying that it was prepared to do more. Elsewhere, oil prices settled near the highest in two months on a soft U.S. dollar. Brent crude futures rose 0.4% to $80.43 per barrel and U.S. West Texas Intermediate crude futures were up 0.4% at $76.03. Gold prices were slightly higher at $1,960,99 per ounce.

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Published by the Mercury Team on 13 July 2023

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