Dollar held firm

Dollar held firm and steady on mounting Fed hike bets. Photo by Ibrahim Boran on Unsplash

Dollar held firm and steady on mounting Fed hike bets

The dollar held firm on Monday supported by growing expectations of further rate hikes by the U.S. Federal Reserve.

Dollar held firm

Dollar held firm and steady on mounting Fed hike bets. Photo by Ibrahim Boran on Unsplash

Reuters: The dollar held firm on Monday supported by growing expectations of further rate hikes by the U.S. Federal Reserve, though news that a debt ceiling deal had been finalised drew some of the safe haven bids away from the greenback.

U.S. Dollar held firm

The U.S. dollar notched a fresh six-month high of 140.91 yen in early Asia trade before reversing some of those gains to last trade at 140.39 yen. It was on course for a monthly gain of about 3% against the Japanese currency. The yen’s renewed decline has come on the back of rising U.S. Treasury yields, as bets grow that interest rates in the United States would stay higher for longer. Data released on Friday showed that U.S. consumer spending increased more than expected in April and inflation picked up, adding to signs of a still-resilient economy. Yields on U.S. Treasuries jumped on the back of the data, with the two-year yield, which typically reflects near-term interest rate expectations, rising to an over two-month high of 4.639% on Friday.

Cash U.S. Treasuries were untraded in Asia on Monday, owing to the Memorial Day holiday in the United States, while futures were broadly steady. Ten-year futures’ implied yield was 3.84%. The UK market is similarly closed on Monday for a holiday. Against the dollar, the euro edged 0.02% higher to $1.0735, while sterling slipped 0.01% to $1.23495. “Whether the dollar sustains the rally that we’re seeing, I think it’ll depend on particularly the wages data, or average earnings within Friday’s payrolls report, and obviously we’ve got CPI before the Fed as well,” said Ray Attrill, head of FX strategy at National Australia Bank. “There’s still quite a lot of data to flow under the bridge before we get to the June meeting.” Money markets are now pricing in a 62% chance that the Fed will raise rates by 25 bps in June, as compared to a roughly 26% chance a week ago, according to the CME FedWatch tool.

The upbeat mood in Asia was dominated by news that U.S. President Joe Biden had finalised a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025. Biden said on Sunday that the deal was ready to move to Congress for a vote. The wave of optimism pushed the risk-sensitive Australian and New Zealand dollars away from their six-month lows hit last week. The Aussie rose 0.41% to $0.6545, while the kiwi edged 0.29% higher to $0.60645. The U.S. dollar index was last 0.15% lower at 104.11, though it remained near last week’s two-month peak of 104.42. “We’ve got a risk-positive response so far to the debt deal news,” said NAB’s Attrill. “Obviously there’s still the need to get this debt deal over the line, but I think markets are happy to travel on the presumption that it will get done before the new X-date.”

U.S. Treasury Secretary Janet Yellen had on Friday said the government would default if Congress did not increase the $31.4 trillion debt ceiling by June 5, having previously said a default could happen as early as June 1. Elsewhere, the Turkish lira remained under pressure at 20.04 per U.S. dollar, after having slumped to a record low of 20.06 per dollar on Friday. President Tayyip Erdogan secured victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.

British Pound

Reuters: The pound rose on Friday after data showed UK retail sales volumes rose at their fastest pace in nearly two years, as renewed consumer confidence helped offset the sting of high inflation and rates. Between February and April, sales rose 0.8% from the previous three months, the biggest such increase since the three months to August 2021, according to data from the Office for National Statistics. Sterling was last up 0.3% against the dollar at $1.2355. The pound has fallen by 1.9% in May, heading for its first monthly decline since February, largely due to a recent swell in investor demand for the U.S. dollar’s safe-haven properties. Against the euro , sterling eased 0.1% to 86.95 pence.

Data this week showed UK inflation fell to 8.4% in April, less than expected, while core price pressures hit 31-year highs, giving BoE policymakers no room for let-up in their quest to tackle price pressures. This week, UK government borrowing rates have shot to their highest since the bond-market meltdown last September after then-Prime Minister Liz Truss’ damaging budget plans. Interest rates in Britain have already risen to their highest in 16 years, at 4.50%, and are now expected to end this year at 5.50%, marking a stark turnaround from just one week ago, when money markets showed traders expected a peak of 4.80% by November. Benchmark 10-year gilt yields are now around 4.378%, having risen nearly 70 basis points in May alone.

Gilts are trading at their largest premium to 10-year U.S. Treasuries in over 14 years, reflecting the greater degree of risk investors attach to UK government debt right now, even in light of the tussle over the U.S. government’s borrowing limit. Bank of England Governor Andrew Bailey said this week he was concerned about the risk of “sticky and stubborn” inflation over the summer after data showed food prices still rising sharply despite a drop back to single digits for the headline inflation rate in April. “While the UK consumer is feeling the effects of much higher prices than the U.S., it should also be remembered that inflation in the U.S. peaked much earlier, back in the summer, which means it could take another five months before UK prices fall to U.S. levels, and even then, core prices might not come down in a hurry,” CMC Markets chief markets strategist Michael Hewson said.

South African Rand

Reuters: The South African rand made a strong recovery on Friday from a new record low struck overnight, after a central bank interest rate hike failed to impress some traders and economists. At 1303 GMT, the rand traded at 19.5700 against the dollar, over 1.17% stronger than its previous closing level. It is now back to the level it was before the South African Reserve Bank announced a 50 basis point interest rate hike on Thursday. On Thursday the rand closed down more than 2.7% against the dollar, as some traders had bet on a larger 75 basis point rate hike. “Thursday’s move may have been overdone,” Greg Davies, head of wealth at asset manager Cratos Capital, told Reuters. “It seems the market is settling down away from the panicked move we had yesterday to more realistic levels.”

Another factor cited behind the rand’s surprise slump on Thursday were comments in the monetary policy statement that the SARB expected further currency weakness ahead. The central bank has raised interest rates 10 consecutive times since November 2021. The latest hikes its interest rate to a 14-year high, an effort to bring inflation back within its 3%-6% target band from 6.8% in April. The rand struck a new all-time low of 19.8175 in the early hours of Friday morning. It is down about 1.6% against the dollar since the end of last week. Shares on the Johannesburg Stock Exchange were weaker. The blue-chip Top-40 index was last 0.14% lower than its previous close while the broader all-share index was down about 0.16%. South Africa’s benchmark 2030 government bond was last stronger, the yield down 5 basis points to 11.115%.

Global Markets

Reuters: Asian shares and U.S. stock futures rose on Monday, thanks to a weekend deal by U.S. President Joe Biden and House Speaker Kevin McCarthy to suspend the government’s debt ceiling, ending a protracted stalemate and providing some relief for investors. After weeks of negotiations, congressional Republican McCarthy and Biden forged an agreement late on Saturday to avert an economically destabilising default to suspend the $31.4 trillion debt ceiling until 2025. The deal will now have to passes through the narrowly divided Congress. The positive news lifted S&P 500 futures 0.2% in Asia while Nasdaq futures firmed 0.4%. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.3%, after a 1.1% drop the previous week. Tokyo’s Nikkei surged 1.3% to a fresh 33-year high.

Moving in the opposite direction, China’s bluechips eased 0.1% while Hong Kong’s Hang Seng index slipped 0.3%, weighed down by profit data for China’s industrial firms on the weekend that reinforced growing signs of loss of momentum in the world’s second-biggest economy. “There may be an initial sliver of relief that may send yields a tad lower along with some U.S. dollar bump-up, alongside equities. But the vagaries of pushing the deal through Congress may hold back the optimism,” said Vishnu Varathan, head of economics at Mizuho Bank in Singapore. “And beyond that the overriding implications on liquidity squeeze from issuances to bolster cash that is running very low at the Treasury may perversely elevate yields and dampen equities. The dollar, though, may be bid.” Cash U.S. Treasuries were untraded in Asia on Monday, owing to the Memorial Day holiday, while futures were broadly steady. Two-year yields hit a 2-1/2 month high of 4.6390% on Friday on markets bets of higher Federal Reserve rates for longer.

U.S. shares rallied at the end of last week on hopes of a debt ceiling deal and on optimism about artificial intelligence. The Dow Jones Industrial Average ended a five-day losing streak on Friday, while the Nasdaq Composite Index and S&P 500 closed at their highest levels since August 2022. “We always thought there was going to be a resolution, and now we have got that, so that removes some of the uncertainty for markets. But when we get past that, when the votes get passed and when we come back from Memorial Day, the question becomes what next?” said Tony Sycamore, market analyst at IG. “Yes, we will get the relief rally in the short-term but then we have to start thinking about the June FOMC meeting, about inflation being stickier than expected, and the money being drained out of the markets.” Federal Reserve’s preferred gauge of inflation – the personal consumption expenditures price index – came in stronger than expected on Friday. Taken together with strong U.S. consumer spending, markets are now leaning towards a quarter-point hike from the Fed next month and seeing rates staying there for the rest of the year.

In the week ahead, more U.S. economic data will be on tap, such as job openings and non-farm payrolls which could influence Fed’s thinking for the June decision. Economists polled by Reuters expect payrolls likely rose 195,000 in May, slowing from 253,000 the prior month. In Turkey, the lira hovered at 20.04 against the dollar , just a touch above its record low of 20.06 hit on Friday, after President Tayyip Erdogan secured victory in the country’s presidential election, extending his increasingly authoritarian rule into a third decade. Elsewhere in the currency markets, the dollar index – a measure of the greenback against its major peers – was a touch lower at 104.17 as risk-sensitive currencies staged a rebound. However, it is still not too far from a two month high hit on Friday. The yen slumped to a fresh six-month low of 140.89 per dollar in early trade, the euro nursed losses around a two-month trough of $1.0727 and the Aussie climbed 0.3% to $0.6535, trying to move away from a six-month low hit on Friday.

Oil prices rallied early Monday. Brent crude futures climbed 0.7% to $77.51 a barrel, while U.S. West Texas Intermediate crude was at $73.4 a barrel, or 1%. Gold prices were 0.2% lower at $1,943.19 per ounce.

Published by the Mercury Team on 29 May 2023

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