Reuters: Sterling was falling back towards a three-week low against the dollar on Thursday, as investors remained cautious after the pound’s recent rally, with the economy stagnating and the labour market softening.
British Pound Sterling was falling
Data on Tuesday showed Britain’s jobless rate rose to 3.9% in the three months to March, while basic pay increased 6.7%, below expectations in a Reuters poll. “You have persistently high core inflation, very slow growth and a softening labour market,” said TraderX strategist Michael Brown. “Things don’t look great at the moment so it’s perhaps no surprise to see sterling lower.” The pound was last down 0.4% against a broadly stronger dollar to $1.2435. On Wednesday it hit a three-week low of $1.2422. The dollar has benefitted from optimism around the debt ceiling, with U.S. President Joe Biden and senior congressional Republican Kevin McCarthy underscoring their determination to reach a deal to raise the $31.4 trillion debt limit and avoid an unthinkable default.
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High beta currencies – ones that tend to be more volatile – such as the pound, could benefit on a debt ceiling resolution, TraderX’s Brown added. “Potentially if you see equities rally a little more this could be supportive of the pound, but there are other currencies I’d rather get exposure to that through, such as the Aussie and Kiwi dollars.” Stocks across the globe rallied on Wednesday and Thursday as traders bet that the U.S. would avoid a default. Eyes were also on Westminster where Bank of England officials were providing testimony in front of parliament’s Treasury Select Committee. Bank of England Deputy Governor Dave Ramsden told the committee that the rate at which the central bank reduces its holding of government bonds was more likely to increase than decrease, as it unwinds its quantitative easing programme. The euro was up 0.2% against sterling to 86.94 pence.
US Dollar
Reuters: The dollar firmed near a six-month peak against the yen on Friday on the back of rising U.S. Treasury yields, as optimism over debt ceiling talks in Washington raised expectations of higher-for-longer interest rates. President Joe Biden and top U.S. congressional Republican Kevin McCarthy earlier this week underscored their determination to strike a deal soon to raise the government’s $31.4 trillion debt ceiling, with hopes of finalising a deal after Biden returns from the Group of Seven meeting in Japan on Sunday. The news helped calm fears of an unprecedented and economically catastrophic American debt default, leading markets to revise their expectations of where U.S. interest rates could go. At the same time, data pointing to a still-tight labour market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also reinforced expectations that the Federal Reserve could deliver another rate hike next month in a bid to tame inflation.
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Two Fed policymakers also said on Thursday that U.S. inflation does not look like it is cooling fast enough to allow the Fed to pause its interest-rate hike campaign. The dollar stayed elevated in early Asia trade on Friday and last bought 138.40 yen, having risen to a near six-month high of 138.75 yen in the previous session. The greenback was eyeing a weekly gain of nearly 2% against the Japanese currency, its largest since February. Similarly, the U.S. dollar index was last at 103.46, flirting with Thursday’s two-month high of 103.63, and was headed for a second straight weekly gain of more than 0.7%. “Optimism about the debt ceiling talks has contributed to a repricing for the Fed, the fact that a deal would remove a big weight on the economy, effectively,” said Ray Attrill, head of FX strategy at National Australia Bank. “It does remove one obstacle to the Fed continuing to raise rates.”
Money markets are now pricing in a 39% chance that the Fed could raise rates by another 25 basis points next month, compared with just about a 10% chance a week ago, according to the CME FedWatch tool. Traders have also pared expectations on the scale of rate cuts expected later this year, with rates seen just above 4.6% by December. U.S. Treasury yields have climbed on the back of the hawkish Fed repricing and amid a pick up in risk sentiment. Yields rise when bond prices fall. The two-year Treasury yield, which typically moves in step with interest rate expectations, last stood at 4.2581%, edging away from a low of 3.964% at the start of the week. The benchmark 10-year yield was last at 3.6476%, having risen nearly 20 bps this week.
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In other currencies, the euro rose 0.06% to $1.0777, but languished near the previous session’s close to two-month low of $1.07625. Sterling gained 0.05% to $1.2415, having fallen about 0.6% on Thursday. The Aussie edged 0.17% higher to $0.6633, having slid on Thursday against a stronger dollar and on data showing that Australia’s employment unexpectedly dipped in April. In Asia, Japan’s core consumer prices rose 3.4% in April from a year earlier as price hikes broadened, data showed on Friday, casting doubt on the central bank’s view inflation will slow back below its 2% target later this year as cost pressures dissipate. “I do think that the numbers do mean that the June and July meetings are live for a possible YCC tweak,” said NAB’s Attrill, referring to the Bank of Japan’s controversial yield curve control policy.
South African Rand
Reuters: South Africa’s rand extended the previous day’s losses on Thursday as the U.S. dollar hovered near a seven-week high on optimism over U.S. debt ceiling talks. At 1529 GMT, the rand traded at 19.3625 against the dollar, almost 0.5% weaker than its previous close. On Wednesday, it fell around 1%. The dollar was last trading up 0.61% at 103.52 against a basket of global currencies, after U.S. government leaders agreed to negotiate to avoid a damaging debt default. The risk-sensitive rand often takes cues from global factors like U.S. economic policy in the absence of major local drivers. It has been weighed down at home by South Africa’s power crisis, with state utility Eskom warning on Thursday that it may have to increase scheduled outages to an even higher level.
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“The broad R19.00/R19.50 range remains intact for now, but there is a distinct feeling of unease over the rand,” said Andre Cilliers, currency strategist at TreasuryONE. “The G7 meeting kicks off today with South Africa not being invited, load-shedding continues unabated, and there is some concern over the S&P’s credit rating review tomorrow,” he said. Local investors will turn their focus towards an interest rate decision by the South African Reserve Bank SARB next week, with analysts expecting another hike. “With the rand’s substantial weakness, the risk to the inflation outlook on balance is still on the upside, and the SARB is widely expected to hike at its meeting next week,” said Investec analyst Annabel Bishop in a research note.
Stock market ended lower, with both the Top-40 index and the broader all-share down over 0.9%. South Africa’s benchmark 2030 government bond was weaker, with the yield up 11 basis points at 11.165%.
Global Markets
Reuters: Asian shares nudged lower on Friday, weighed down by China and Hong Kong stocks due to concerns over the stuttering recovery in the world’s second-biggest economy, although Japan’s Nikkei clocked a near 33-year peak. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.20% but was set to eke out a gain of 0.19% for the week. China shares fell 0.61%, while Hong Kong’s Hang Seng index dropped as much as 1.8%, dragged down by tech stocks after Alibaba Group Holding Ltd, reported a lower-than-expected 2% rise in quarterly revenue. Data in the week underscored that China’s economy lost momentum at the beginning of the second quarter, stoking worries over the wobbly post-COVID-19 recovery. Japan’s Nikkei though continued its ascent, rising to its highest since August 1990, during the country’s so-called bubble era. Investor attention has been firmly on the negotiations over U.S. debt ceiling and increasing hopes that a deal could be reached sent U.S. shares higher overnight . E-mini futures for the S&P 500 rose 0.16%.
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U.S. President Joe Biden and House of Representatives Speaker Kevin McCarthy, the top Republican in Washington, hope to finalise a deal on the debt ceiling after Biden returns from the Group of Seven meeting in Japan on Sunday. “What makes things more complicated this year is that the Democrats and Republicans are so wide apart from each other, negotiations will take a long time because each one is trying to get something out of that negotiations,” said Alexandre Tavazzi, head of CIO office and macro research for Pictet Wealth Management. Meanwhile, data overnight showed fewer-than-expected Americans filed initial jobless claims last week, lowering odds that the Federal Reserve will cut interest rates before year-end. Hawkish rhetoric from Fed speakers continued with Dallas Fed President Lorie Logan and St. Louis Fed President James Bullard saying inflation was not cooling fast enough to allow the Fed to pause its interest-rate hike campaign.
Markets are now pricing in 36% chance of a 25 basis point hike when the Fed meets next month, compared with 10% chance a week earlier, CME FedWatch tool showed. Focus will now switch to Fed Chair Jerome Powell’s panel discussion later in the global day. ActivTrades market analyst Anderson Alves said the hawkish narrative starkly contrasts with the message from May’s Fed meeting, which signalled a high bar for future hikes, a sentiment that Powell seemingly did not discourage during the last news conference. In the currency market, the yen strengthened 0.14% to 138.51 per dollar, but was near the six-month low of 138.75 it touched overnight. Against a basket of currencies, the dollar rose 0.077% and was wedged near a two-month high. The euro was down 0.07% to $1.0761, while sterling was last trading at $1.2391, down 0.14% on the day.
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The offshore yuan fell to 7.0677 per dollar, the weakest since Dec. 2. Analysts predict more weakness in the future and point to the Fed’s policy as being the bigger driver than economic weakness at home. U.S. crude fell 0.14% to $71.76 per barrel and Brent was at $75.78, down 0.11% on the day. Spot gold eased 0.1% to $1,956.18 an ounce.
Published by the Mercury Team on 19 May 2023
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