US dollar

Dollar cautiously firm ahead of busy central bank week. Photo by John Guccione

Dollar cautiously firm ahead of busy central bank week

The dollar was cautiously firm against a basket of currencies on Monday, as traders looked ahead to a slew of central bank meetings this week.

US dollar

Dollar cautiously firm ahead of busy central bank week. Photo by John Guccione

The dollar was cautiously firm against a basket of currencies on Monday, as traders looked ahead to a slew of central bank meetings this week.

US Dollar cautiously firm

Reuters: The dollar firmed on Monday and distanced itself from an eight-month trough ahead of a slew of central bank meetings this week, including the Federal Reserve’s, with traders keenly focused on guidance for the path of interest rate rises. The U.S. dollar index, which measures the greenback against a basket of currencies, rose 0.03% to 101.92, edging away from last week’s eight-month low of 101.50. However, it remained on track for a fourth straight monthly loss of 1.5%, pressured downward by expectations that the Fed was nearing the end of its rate-hike cycle and that interest rates would not have to rise as high as previously feared. Sterling was up 0.01% at $1.24005, while the kiwi edged 0.09% higher to $0.6500. Moves were subdued ahead of policy meetings from the Fed, the European Central Bank and the Bank of England later this week.

“We will range trade a little bit as the market tries to assess how the central banks behave …. I think, for all three it’s going to be more about what they say than what they do,” said Rodrigo Catril, a currency strategist at National Australia Bank. The Fed is widely expected to deliver a 25 basis point rate hike, while the ECB and the BoE are likely to raise rates by 50bp each. The euro was last 0.03% higher at $1.08705 and was on track for a monthly gain of nearly 1.5%, marking its fourth straight month of increases. The single currency has got support from continued hawkish rhetoric by ECB policymakers and ebbing fears of a deep recession in the euro zone. Elsewhere, the Aussie rose 0.11% to $0.71175, while the Japanese yen slipped marginally to 129.94 per dollar.

Core consumer prices in Japan’s capital for the month of January marked the fastest annual gain in nearly 42 years, data on Friday showed, keeping the Bank of Japan under pressure to phase out its economic stimulus. With China returning from its Lunar New Year holiday, focus will be on the upcoming release of its purchasing managers’ index data on Tuesday. “The market will be looking … hopefully not to get disappointed,” said NAB’s Catril. “So far, the data coming from China, or the vibes coming from China, do play to the view that a good reopening in terms of activity is likely to unfold.” Lunar New Year holiday trips inside China surged 74% from last year after authorities scrapped COVID-19 travel curbs, state media reported on Saturday. The offshore yuan was last more than 0.1% higher, at 6.7465 per dollar.

The British Pound

Reuters: Sterling edged lower on Friday but was not far from its highest level in over seven months against the dollar. Investors expect the British economy’s slowdown to end the Bank of England tightening cycle soon, in a move which might weaken the pound in the short-term. British private-sector economic activity fell at its fastest rate in two years in January, a survey showed on Tuesday. Some analysts flagged substantial short-sterling positioning on expectations for a turn in the BoE cycle. The BoE looks on course to raise its main interest rate by half a percentage point to 4% on Feb. 2, but economists will be looking for signals that this 10th consecutive rate rise will be one of the BoE’s last.

Sterling was down 0.25% versus the greenback at $1.238. It hit its highest since June 10 at $1.2447 on Jan. 23. The U.S. dollar index was roughly stable, with traders bracing for a critical week when the central banks responsible for the greenback, the pound and the euro will meet. The pound was down 0.2% against the euro at 87.95 pence per euro. However, some analysts are bullish on sterling in the medium term as, they said, markets already priced in the worst-case scenario for the British economy. “We may have reached or are close to reaching ‘peak pessimism’ in regard to the UK, and that GBP could see better times ahead,” said Derek Halpenny, head of research global markets at MUFG. “Fiscal credibility has improved, and in circumstances of declining global inflation and better market conditions that would come with that, external financing concerns would diminish,” he added.

British finance minister Jeremy Hunt promised on Friday to tackle the country’s weak productivity with post-Brexit reforms to boost growth. Markets are also watching talks around the so-called Northern Ireland Protocol, which might help brighten the mood over the pound. Analysts said that better relations could help establish greater trust and open up scope for flexibility in other areas to remove trade barriers with the EU and improve what some market participants see as a hard Brexit deal. It’s not clear if Britain and the European Union can reach a deal on tweaking post-Brexit trade rules for Northern Ireland in time for the mid-April anniversary of the region’s 1998 peace deal, Irish Prime Minister Leo Varadkar said on Wednesday.

South African Rand

Reuters: The South African rand stabilised on Friday, after losses a day earlier when the central bank raised interest rates less than expected. At 1440 GMT, the rand traded at 17.2050 against the dollar, not far from its previous close 17.2000. The South African Reserve Bank raised its repo rate by 25 basis points to 7.25% on Thursday, less than the 50-bp hike expected by the majority of economists polled by Reuters and following three 75-bp hikes in a row.

“The less hawkish stance was immediately evident in the performance of the rand, which depreciated,” ETM Analytics said in a note. Thursday’s decision suggests South Africa has reached the interest rate peak or that at most there might be another 25-bp increase left in a hiking cycle that started in November 2021, ETM Analytics said. The Johannesburg Stock Exchange’s All-share index was up about 0.4%. The government’s 2030 bond was slightly weaker, with the yield up 3.5 basis points to 9.675%.

Global Markets

Reuters: Asian shares turned cagey on Monday ahead of a week that is certain to see interest rates rise in Europe and the United States, along with U.S. jobs and wage data that may influence how much further they still have to go. Earnings from a who’s who of tech giants will also test the mettle of Wall Street bulls, who are looking to propel the Nasdaq to its best January since 2001. Asia has been no slouch either as China’s swift reopening bolsters the economic outlook, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 11% in January so far at a nine-month high. The index was off 0.2% on Monday with markets mixed across the region. Japan’s Nikkei went flat, while Taiwan jumped 3.1%. The Nikkei newspaper reported Renault was to lower its share holding in Nissan to 15%, while the latter would invest in Renault’s EV business. Chinese blue chips climbed 1.1% after returning from the holidays. Beijing reported Lunar New Year travel trips inside China surged 74% from last year, though that was still only half of pre-pandemic levels.

S&P 500 futures and Nasdaq futures both eased 0.3%, while EUROSTOXX 50 futures and FTSE futures dipped 0.2%. Investors are confident the Federal Reserve will raise rates by 25 basis points on Wednesday, followed the day after by half-point hikes from the Bank of England and European Central Bank, and any deviation from that script would be a real shock. Just as important will be the guidance on future policy with analysts expecting a hawkish message of inflation is not yet beaten and more needs to be done. “With U.S. labor markets still tight, core inflation elevated, and financial conditions easing, Fed Chair Powell’s tone will be hawkish, stressing that a downshifting to a 25bp hike doesn’t mean a pause is coming,” said Bruce Kasman, chief economist at JPMorgan, who expects another rise in March. “We also look for him to continue to push back against market pricing of rate cuts later this year.”

There is a lot of pushing to do given futures currently have rates peaking at 5.0% in March, only to fall back to 4.5% by year end. Yields on 10-year notes have fallen 33 basis points so far this month to 3.50%, essentially easing financial conditions even as the Fed talks tough on tightening. That dovish outlook will also be tested by data on U.S. payrolls, the employment cost index and various ISM surveys. Figures on EU inflation could be important for whether the ECB signals a half-point rate rise for March, or opens the door to slowdown in the pace of tightening. As for Wall Street’s recent rally, much will depend on earnings from Apple Inc,, Alphabet Inc and Meta Platforms, among many others. “Apple will give a glimpse into the overall demand story for consumers globally and a snapshot of the China supply chain issues starting to slowly abate,” wrote analysts at Wedbush.

“Based on our recent Asia supply chain checks we believe iPhone 14 Pro demand is holding up firmer than expected,” they added. “Apple will likely cut some costs around the edges, but we do not expect mass layoffs.” Market pricing of early Fed easing has been a burden for the dollar, which has lost 1.6% so far this month to stand at 101.790 against a basket of major currencies. The euro is up 1.5% for January at $1.0878 and just off a nine-month top. The dollar has even lost 1.3% on the yen to 129.27 despite the Bank of Japan’s dogged defence of its uber-easy policies. The drop in the dollar and yields has been a boon for gold, which is up 5.8% for the month so far at $1,930 an ounce. China’s rapid reopening is seen as a windfall for commodities in general, supporting everything from copper to iron ore to oil prices. The oil market was hesitant on Monday, with Brent off 11 cents at $86.55 a barrel, while U.S. crude eased 3 cents to $79.65.

Published by the Mercury Team on 27 January 2023

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