Reuters: The U.S. dollar firms near a seven-week peak on Thursday, after President Joe Biden and top U.S. congressional Republican Kevin McCarthy worked towards avoiding a damaging debt default, while the Aussie dollar slipped after disappointing jobs data.
US Dollar firms
Biden and McCarthy on Wednesday underscored their determination to strike a deal soon to raise the government’s $31.4 trillion debt ceiling, having agreed a day earlier to negotiate directly after a months-long standoff. While the upbeat meeting helped calm fears of an unprecedented American debt default, a cautious air tempered risk-taking. U.S. Treasury yields remained elevated in early Asia trade after having risen in the previous session, as investors sold off the safe-haven bonds in the wake of the positive signs on the debt ceiling negotiations. Yields rise when bond prices fall. The pop up in treasury yields helped lift the U.S. dollar. Against a basket of currencies, the dollar index firmed near its seven-week peak hit in the previous session, and last stood at 102.86.
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“We got some positive headlines over the debt ceiling negotiations, so that obviously supported market sentiment,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “As a result, yields have risen and equities also posted some solid gains.” The two-year Treasury yield was last at 4.1414%, after having risen as much as 10 basis points in the previous session, while the benchmark 10-year Treasury yield last stood at 3.5665%. Early market action in Asia was partly led by the Aussie dollar, after data on Thursday showed that Australia’s employment unexpectedly dipped in April, following two months of outsized gains. The jobless rate also ticked up, in a sign that the red-hot labour market might be cooling. The Aussie slipped more than 0.3% after the data and was last 0.26% lower at $0.6642.
The euro was pressured near an over six-week low at $1.0841. The single currency had bottomed at $1.08105 on Wednesday, its lowest since April 3. The Japanese yen last bought 137.50 per dollar, having fallen nearly 1% on Wednesday. “The dollar typically falls in the lead up to the debt ceiling being reached, so I think the dollar gains overnight were partly an unwinding of previous falls driven by concerns about a U.S. default,” said Kong. Elsewhere, sterling was last 0.02% lower at $1.2485, having similarly fallen to a three-week low in the previous session. The kiwi fell 0.05% to $0.6245, while the Chinese offshore yuan slipped nearly 0.1% to 7.0147 per dollar. The yuan had weakened past 7 per dollar on Wednesday for the first time in five months, amid geopolitical tensions and more signs of China’s post-COVID recovery losing steam.
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South African Rand
Reuters: The South African rand weakend on Wednesday, ahead of March retail sales data that could provide clues on the health of the local economy. At 0904 GMT, the rand traded at 19.21000 against the dollar, around 0.69% weaker than its previous close. The dollar was last trading up around 0.37% at 102.98 against a basket of global currencies after investors leaned towards the safe-haven asset as U.S. debt ceiling talks continue. Statistics South Africa released retail sales data for March around 1100 GMT. Analysts polled by Reuters predicted a 0.7% year-on-year decline. Sentiment also soured on local media reports of a further delay to maintenance at the country’s only nuclear power station, heightening fears that South Africa’s ongoing power crisis will deepen. EE Business Intelligence reported that one of the Koeberg’s plants reactors currently offline for maintenance will be shut for a further 200 days.
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The country faces its worst blackouts on record, leaving households and businesses without power for up to 10 hours daily and crippling the economy. JP Morgan predicts a 0.2% contraction of the country’s gross domestic product for 2023. Last week, the rand hit an all-time low of 19.5100 against the dollar following record power cuts and allegations that South Africa shipped weapons for Russia. “Panic has eased, but South African markets, are settling at levels worse than before last-week’s run,” Rand Merchant Bank analysts said in a research note. “The impetus to break 19.00 is steadily failing,” they added. South Africa’s Eurobonds fell up to 1.3 cents in the dollar, with the 2052 maturity down 1.318 cents to 80.47 cents at 0909 GMT, according to Tradeweb data. The benchmark local 2030 government bond weakened, with the yield up 14 basis points at 10.895%.
British Pound
Reuters: The pound slipped against a strengthening dollar on Wednesday and maintained its losses after Bank of England Governor Andrew Bailey reiterated he expected price pressures to ease, as soon as April. Speaking at the British Chambers of Commerce Global Annual Conference, Bailey said that if price pressures were to be more persistent, further tightening of policy may be required, but added there were signs the labour market was loosening a little. On Tuesday, data showed Britain’s jobless rate rose to 3.9%, while the rate of increase in total pay, including bonuses, held steady, prompting some investors to scale back their bets on further interest rate hikes. “We took a dovish view from what the Bank of England was telling us last week and thankfully the labour market data has confirmed that,” said Simon Harvey, head of FX analysis at Monex Europe. “While we think that conditions in the UK economy are a bit more constructive towards capital inflows, we don’t think that the improvement is so vast that you’re going to see sterling continue to outperform,” he added.
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The pound was last down 0.3% at $1.2440, having earlier hit a three-week low of $1.2422. Sterling was little changed at 87.01 pence per euro. The BoE has raised rates by a combined 400 basis points since it began tightening policy in late 2021, but markets are split on the central bank’s next move. Traders price in around a two-in-three chance of a 25 basis point hike at the June meeting, with around a one-in-three chance they remain on hold, according to data from Refinitiv. Much will depend on the strength of future data, with next week’s April inflation print a key input. CitiFX’s economic surprise index for the UK is holding near its highest level in almost two years, suggesting data is more upbeat compared to expectations, supporting the pound in recent weeks. But this also means the bar is higher for potential positive surprises, which analysts said could leave the pound vulnerable if data starts surprising to the downside.
Global Markets
Reuters: Asia-Pacific share indexes rallied on Thursday, following Wall Street’s lead, and the dollar held just below a two-month high versus the yen amid signs the United States might be close to a deal to raise the debt ceiling and avert a disastrous default. On Wednesday, President Joe Biden and top U.S. congressional Republican Kevin McCarthy underscored their determination to reach an agreement soon, pledging to negotiate directly on a deal amid estimates the Treasury could run out of money by the start of June. “It is possible to get a deal by the end of the week,” McCarthy told reporters. “It’s not that difficult to get to an agreement.” As investors drew comfort from that reassurance, MSCI’s broadest index of Asia-Pacific shares pushed 0.78% higher. “Markets have chosen to be optimistic,” Rodrigo Catril, senior FX strategist at National Australia Bank, wrote in a client note. “History, of course, tells us that a deal is more likely than not to be reached on the 11th hour, suggesting there is still room for a few bad headlines,” he added, noting as a case in point, “Treasury has almost run through all of its authorised extraordinary measures to keep paying the bills.”
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Japan’s Nikkei continued to outperfrom the region, surging to a fresh 20-month peak of 30,667.13, before last trading 1.2% higher at around 30,450. Any advance above 30,795.78 would take it to the highest since 1990, when Japan’s bubble economy had still to burst. Hong Kong’s Hang Seng gained 0.93%. Mainland blue chips rose 0.37%. Australia’s stock benchmark gained 0.59%, and received an additional tailwind from domestic data showing an unexpected fall in employment in April, taking some pressure off the Reserve Bank for further tightening. The Aussie dollar suffered though, flipping from a small gain to a loss of as much as 0.44% following the jobs report. Long-term U.S. Treasury yields eased back in Tokyo after rising to the highest since March 1 at 3.589% in New York.
And among the major currency pairs, the dollar paused for breath in a rally that took it to fresh six-week high of $1.08105 per euro overnight. Against the Japanese currency, the dollar surged the most in three weeks to 137.72 yen, just 0.06 yen below its highest since March 8. The dollar clung close to a 5 1/2-month high above 7 yuan in offshore trading after topping the closely watched level on Wednesday. The Chinese currency is also under pressure from a string of weak data that suggested Asia’s biggest economy may have already passed the peak of its post-COVID recovery. Gold found its feet around $1,984 per ounce after dipping to a three-week low of $1,974.30 in the previous session. Oil eased a little after Wednesday’s $2 rallies for both Brent and West Texas Intermediate crude. Brent crude futures slipped 24 cents to $76.72 a barrel. U.S. West Texas Intermediate crude retreated 21 cents to $72.62.
Published by the Mercury Team on 18 May 2023
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