Dollar headed for monthly loss: Yen steady ahead of BOJ decision

Reuters: The U.S. Dollar headed for monthly loss on Friday on mounting expectations the Federal Reserve could soon end its aggressive rate-hike cycle, while the yen steadied near a one-week high ahead of a pivotal central bank decision.

US Dollar headed for monthly loss

The Bank of Japan’s monetary policy decision on Friday takes centre stage in Asia, where expectations are for new BOJ Governor Kazuo Ueda to keep monetary settings ultra-loose at his debut policy meeting. Focus will also be on Ueda’s tone, with investors closely looking out for any tweak in forward guidance. Ahead of the decision, the Japanese yen was roughly 0.1% higher at 133.84 per U.S. dollar, and similarly gained more than 0.1% against the British pound.

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“I don’t expect the BOJ to change its monetary policy this tme, but the newly-released Tokyo CPI was higher than expected I think this puts pressure on the BOJ, they might do something in the near future,” said Tina Teng, market analyst at CMC Markets. Core consumer prices in Japan’s capital, Tokyo, rose 3.5% in April from a year earlier, government data showed on Friday, beating market forecasts in a sign of broadening inflationary pressure in the world’s third-largest economy. In the broader currency market, the U.S. dollar dipped against most major peers but its losses were capped by data pointing to still-sticky inflation in the world’s largest economy, which reinforced expectations for a 25-basis-point rate hike at next week’s FOMC meeting.

Against a basket of currencies, the U.S. dollar index last stood at 101.45 and was headed for a monthly loss of more than 1%, after having fallen about 2.3% in March. Sterling slipped 0.06% to $1.2492. Data released on Thursday showed that while U.S. economic growth slowed more than expected in the first quarter, consumer spending, which was accompanied by a rise in inflation, accelerated. A measure of inflation in the economy, the price index for gross domestic purchases, rose at a 3.8% pace after increasing at a 3.6% rate in the fourth quarter, while the core PCE price index jumped at a 4.9% rate after advancing at a 4.4% pace in the prior quarter. “The Fed is widely expected to hike again next week but with inflation remaining sticky, we expect the Fed to stay on hold for the remainder of the year, dashing hopes of a policy pivot in (the second half),” said analysts at Societe Generale.

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Elsewhere, the euro held near a recent one-year high and last bought $1.1033. It was eyeing a monthly gain of close to 2%. The common currency has been buoyed by expectations the European Central Bank still has more to go in raising interest rates, in contrast with a dovish repricing of its U.S. counterpart. “Investors favour currencies that can offer both an ongoing domestic tightening cycle and still some room for a hawkish surprise at the coming meetings,” said ING analysts. “In that sense, the euro is one of the very few currencies that can offer this combination at the moment.” Down Under, the Australian dollar rose 0.05% to $0.66335, while the kiwi gained 0.07% to $0.61515.

British Pound

Reuters: Sterling steadied against the dollar on Thursday, after two volatile days largely cancelled each other out, leaving the British currency not far off a 10-month peak. The pound was flat at $1.2471, having risen 0.48% on Wednesday and fallen 0.58% on Tuesday as markets vacillated over whether U.S. banking jitters and a standoff over the debt ceiling was good or bad news for the dollar. “Risk aversion is positive for the dollar, but it looks like the problems are concentrating in the U.S. so that means if there is a response from central banks its going to be larger in the U.S.,” said Jan von Gerich, chief analyst at Nordea.

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A conveyor belt of interest rate hikes in Europe just as U.S. rates near a peak have been supporting the pound and euro. Sterling hit a 10-month high of $1.2545 on 14 April. Von Gerich said as for the pound/dollar pair specifically “in the short term it is a dollar story, but of course we have a Bank of England meeting coming up and they will not have an easy choice because of the inflation picture.” Britain was the only country in western Europe with double-digit inflation in March. The BoE’s next rate setting meting is on May 11.

The pound has largely managed to cling to the coattails of the resurgent euro, and on Thursday the European single currency was up 0.1% at 88.67 pence, within its recent range. By contrast the euro hit a one year high against the dollar on Wednesday. The pound’s moves against the tumbling Australian dollar have been particularly dramatic, and it hit at 14-month high of A$1.8929 on Wednesday, a near 10% gain since the pound’s early Feb low.

South African Rand

Investec: Liquidity conditions in the ZAR market may be thinner than usual today as many local traders will be enjoying a long weekend afforded by yesterday’s and Monday’s public holidays. Trade may therefore reflect a reluctance to adopt any significant positions, especially since investors will also be facing some important economic data. When pulling the lens back slightly, however, the ZAR remains weak against the USD, GBP, EUR. It is particularly oversold against the dollar, suggesting that a recovery looks likely through the coming quarters.

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For now, the ZAR is struggling to make any headway, with geopolitical optics remaining poor and load-shedding constraining SA’s growth outlook. Investors continue to flee SA’s shores, with the ZAR’s best hope for recovery lying in an expected global monetary policy pivot later this year that will encourage a new search for yield. At 7:00AM GMT the rand was trading at 22.90 to the pound, 18.35 to the dollar and 20.23 to the euro.

Global Markets

Reuters: Asian stocks rose on Friday as strong corporate earnings lifted sentiment despite lingering worries over economic weakness, while the yen dipped after the Bank of Japan kept rates ultra-low even as it announced a broad review of monetary policy. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.45% higher but remained on course to end the month lower. Japan’s Nikkei jumped 1% while the yen weakened 0.60% to a one-week low of 134.76 per dollar and Japanese government bonds rallied. The BOJ kept its loose monetary settings unchanged but revamped its guidance on the future path of policy, and announced a “broad-perspective” review of its monetary policy. The central bank in its first meeting under new governor Kazuo Ueda modified its forward guidance by removing a pledge to keep interest rates at “current or lower levels.” “The wait for the announcement sparked quite a bit of volatility in the yen and rising expectations that we will get a tweak,” said Charu Chanana, a market strategist at Saxo Markets in Singapore. “But eventually, even their announcement of a policy review came with a 1-1.5 year timespan which was longer than what market expected.”

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Overnight, U.S. stocks closed sharply higher on Thursday thanks to upbeat results from bellwether tech firms, with Meta Platforms Inc, Microsoft Corp and Alphabet Inc soaring after reporting results. “As earnings season accelerates, macro and geopolitical clouds are receding, and company fundamentals are increasingly driving the market,” said Lewis Grant, senior portfolio manager for global equities at Federated Hermes. “Investor sentiment remains every bit as fragile as the global economy and earnings season provides much needed visibility on the general health of firms.” E-mini futures for the S&P 500 eased 0.14% after Amazon.com Inc signalled its cloud growth would slow further as its business customers braced for turbulence and clamped down on spending. Futures indicated European stocks were set for higher open, with Eurostoxx 50 futures up 0.46%, German DAX futures up 0.40% and FTSE futures up 0.34%. China shares was 0.87% higher. Geopolitical tensions along with worries over the global economic outlook have crimped investor sentiment in recent weeks.

Data overnight showed the U.S. economy slowed more than expected in the first quarter, even as price growth came in hotter than economists had projected. Taylor Nugent, an economist at National Australia Bank, said the data showed “an unhappy combination” of softer-than-expected growth and stronger-than-expected prices increases in first quarter. The core PCE price index, one of the measures of inflation tracked by the Federal Reserve, jumped at a 4.9% rate after advancing at a 4.4% pace in the prior quarter. Data also showed that initial claims for unemployment benefits fell, suggesting ongoing tightness in the labour market, a major driver of inflation. “Stubborn inflation data gives the Fed little breathing room to take heed of nascent slowing in activity and the labour market should it continue to develop,” Nugent said. Markets are pricing in an 85% chance of the Fed raising interest rates by 25 basis points at its meeting next week, the CME FedWatch tool showed. Traders expect the hike to be the last in the U.S. central bank’s fastest monetary policy tightening cycle since the 1980s.

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The yield on 10-year Treasury notes was down 1.7 basis points to 3.511%, after clocking their biggest intraday gain since March on Thursday as investors weighed the looming debt ceiling showdown in Washington. The yield on the 30-year Treasury bond was down 1.3 basis points to 3.743%. The dollar index , which measures the currency against six rivals, rose 0.227%, with the euro down 0.16% to $1.1009. U.S. crude recently rose 0.54% to $75.16 per barrel and Brent was at $78.89, up 0.66% on the day.

Published by the Mercury Team on 28 April 2023

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