Dollar nears eight-month low ahead of central bank meetings
Dollar nears eight-month low ahead of central bank meetings
Dour earnings season and concerns about a potential recession have investors selling as the Dollar nears eight-month low ahead of central bank meetings.
Reuters: The dollar lolled nears an eight-month low against its peers on Thursday, as a gloomy U.S. corporate earnings season stoked recession fears and as traders stayed on guard ahead of a slew of central bank meetings next week. The U.S. dollar index, which measures the greenback against a basket of currencies, last stood at 101.53, languishing near last week’s eight-month trough of 101.51. Trading was thin on Thursday, with Australia out for a holiday and some parts of Asia still away for the Lunar New Year. Downbeat earnings and guidance from U.S. corporates and a string of tech sector layoffs have deepened fears of an economic downturn in the United States, leading investors to pare back expectations on how much longer the Federal Reserve will need to aggressively raise interest rates. “There are now signs the U.S. economy may be slowing in a more meaningful manner,” said economists at Wells Fargo.
“With the Fed no longer leading the charge on interest rate hikes and U.S. economic trends set to worsen, we now believe the U.S. dollar has entered a period of cyclical depreciation against most foreign currencies.” The Fed’s policy-setting committee will begin a two-day meeting next week, and markets have priced in a 25-basis-point interest rate hike, a step down from the central bank’s 50 bp and 75 bp increases seen last year. Markets expect policymakers at the Bank of England and European Central Bank, who will also meet next week, to deliver 50 bp rate hikes. The ECB is seen most likely to remain hawkish. Sterling was last 0.12% higher at $1.2415, while the euro rose 0.05% to $1.0920, flirting with its nine-month high of $1.0927 hit on Monday.“The euro does draw a lot of attention,” said Jarrod Kerr, chief economist at Kiwibank. The euro zone “had a favourable winter. The energy crisis that people were expecting hasn’t quite played out yet.”
Elsewhere, the Canadian dollar last traded at 1.3393 per dollar, after the Bank of Canada on Wednesday raised its key interest rate to 4.5% but became the first major central bank fighting global inflation to say it would likely hold off on further increases for now. The Aussie edged 0.06% higher to $0.7107, after jumping 0.8% on Wednesday following shock data showing Australian inflation had surged to a 33-year high last quarter, bolstering the case for the Reserve Bank of Australia to raise interest rates again next month. The kiwi steadied at $0.6480, having slumped 0.43% in the previous session after New Zealand’s fourth-quarter annual inflation came in below its central bank’s forecast. In Asia, the Japanese yen rose 0.3% to 129.21 per dollar. Bank of Japan policymakers debated the inflation outlook at their January meeting, with some warning that it could take time for wages to rise sustainably, a summary of opinions at their meeting showed on Thursday. At that meeting, the BOJ kept ultra-low interest rates unchanged but beefed up a monetary policy tool to prevent the 10-year bond yield from breaching its new 0.5% cap. Its decision defied market expectations of further tweaks to monetary policy.
Reuters: Sterling fell against the dollar and the euro on Wednesday after data showed British manufacturers unexpectedly lowered their prices in December, which suggested inflation may be easing, ahead of next week’s Bank of England policy meeting. The pound was down around 0.37% to $1.22950, and down 0.15% against the euro at around 88.40 pence. The declines come after data on Wednesday showing Britain’s manufacturers unexpectedly reduced their prices in December by the most since April 2020. The news that UK factories reduced prices is likely to take some pressure off Bank of England policymakers, who must consider how far to hike interest rates in the battle to bring down inflation.
Meanwhile recession fears remain at the forefront of traders’ minds, after private-sector economic activity was seen falling at its fastest rate in two years in January, with businesses blaming higher Bank of England interest rates, strikes and weak consumer demand. The soaring cost of debt was also reflected in data on Tuesday showing Britain’s government borrowed more last month than in any December since monthly records began 30 years ago. “The data yesterday was not good and showed a somewhat diverging outlook compared to the EU, where things appear to be looking a little brighter,” said Stuart Cole, head macro economist at Equiti Capital.
“The bigger picture was yesterdays PPI numbers which have shown inflationary pressures to be receding and which have cast doubts on how far the BoE will ultimately raise interest rates too.” The market is expecting the BoE to hike interest rates for the tenth time since late 2021 as it battles inflation. Markets are currently placing a 75% chance of a 50 bps rate hike at the BoE meeting. The Federal Reserve and the European Central Bank both hold policy meetings next week. The market is expecting the BoE to hike interest rates for the tenth time since late 2021 as it battles inflation. Markets are currently placing a 75% chance of a 50 bps rate hike at the BoE meeting. The Federal Reserve and the European Central Bank both hold policy meetings next week.
Reuters: The South African rand was little changed on Wednesday as investors awaited an interest rate decision on Thursday. At 1640 GMT, the rand traded at 17.1800 against the U.S. dollar, compared to Tuesday’s close of 17.1850. “There is clear reluctance to adopt any significant directional momentum while investors wait for the SARB’s decision and guidance tomorrow,” ETM Analytics said in a research note. A Reuters poll published last week showed that 11 of 20 economists expect the South African Reserve Bank to hike rates by 50 basis points to 7.50% at its monetary policy meeting on Thursday. Eight project an increase of 25 bps and one forecast no change.
ETM Analytics said in a research note. A Reuters poll published last week showed that 11 of 20 economists expect the South African Reserve Bank to hike rates by 50 basis points to 7.50% at its monetary policy meeting on Thursday. Eight project an increase of 25 bps and one forecast no change. Most economists polled by Reuters see no further rate hikes after this week. “Any comments that come across as hawkish will help the rand recover lost ground,” ETM said. Crippling power cuts have weighed on the rand in 2023, with struggling state utility Eskom on Wednesday announcing an increase in the intensity of the outages for the remainder of the week.
The Johannesburg Stock Exchange’s All-share index closed down about 0.4%. The yield on the government’s benchmark 2030 bond rose 1 basis point to 9.65%, reflecting a weaker price.
Reuters: Asian equities rose to a fresh seven-month high on Thursday, with Hong Kong shares playing catch-up to other markets’ gains as trade resumed after its three-day Lunar New Holiday. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.56% to 555.81. Hong Kong’s Hang Seng index was 1.6% higher. Japan’s Nikkei was, however, 0.25% lower. Trading was thin on Thursday with Australia closed for a holiday and certain parts of Asia, including China, still away for the Lunar New Year. Traders betting that the U.S. Federal will soon tone down its aggressive rate hike policy got a lift after the Bank of Canada on Wednesday became the first major central bank to say it would likely hold off on further increases for now. After a series of super-sized rate hikes last year, the U.S. central bank is now largely expected to raise rates by a smaller 25 basis points next week on signs that inflation is cooling.
“The US GDP release today will be of key interest to gauge whether the market expectations shifting in favour of a soft landing rather than a recession can continue to hold,” Saxo strategists said in a note to clients.The prospect of a less aggressive pace in monetary tightening has stoked expectations of a so-called soft landing – a scenario in which inflation eases against a backdrop of weakening but resilient economic growth. But weak corporate earnings so far have revived worries over the economic impact of the Fed’s restrictive policy and the S&P 500 ended lower overnight. Boeing Co on Wednesday reported a wider loss for 2022 on weakness in its defense unit as it warned of further supply chain issues, with the U.S. planemaker missing Wall Street expectations on revenue and earnings per share in the final quarter of the year.
Investor attention will also be on the Bank of England and European Central Bank meetings due next week, with traders looking for clues as to when the central banks are likely to turn dovish. In the currency market, the dollar index, which measures the U.S. currency against six major rivals, was at 101.57, not far off the eight-month low of 101.51 it touched last week. The Japanese yen strengthened 0.32% to 129.19 per dollar, while sterling was last trading at $1.2407, up 0.06% on the day. The yield on 10-year Treasury notes was down 1.7 basis points at 3.445%, while the yield on the 30-year Treasury bond was down 2.2 basis points at 3.602%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -68.8 basis points. The inversion of this curve has predicted eight of the last nine recessions, analysts have said. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 0.6 basis points at 4.131%.
Oil prices were up as U.S. crude stocks rose less than expected, with U.S. West Texas Intermediate (WTI) crude rising 0.42% to $80.49 per barrel and Brent at $86.24, up 0.14% on the day. Gold prices hit a nine-month high on Thursday, with spot gold flat at $1,946.73 per ounce after hitting its highest level since April 2022.
Published by the Mercury Team on 26 January 2023
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