Dollar held tight as Fed rate cut bets strengthen

Dollar held tight as Fed rate cut bets strengthen. Photo by Alexander Grey on Unsplash

Dollar held tight as Fed rate cut bets strengthen

The dollar helt tight on Monday as markets took stock of cautious remarks from Fed Chair Jerome Powell as they waited on a key employment report that could influence the outlook for U.S. interest rates.

Dollar held tight as Fed rate cut bets strengthen

Dollar held tight as Fed rate cut bets strengthen. Photo by Alexander Grey on Unsplash

Reuters: The dollar helt tight on Monday as markets took stock of cautious remarks from Federal Reserve Chair Jerome Powell as they waited on a key employment report that could influence the outlook for U.S. interest rates.

U.S. Dollar held tight on Monday

Bitcoin grabbed the spotlight in the Asian morning, reaching the $40,000 level for the first time in over a year. Powell said on Friday it was clear that U.S. monetary policy was slowing the economy as expected, with the benchmark overnight interest rate “well into restrictive territory.” While Powell reiterated that the Fed is prepared to tighten policy further if deemed appropriate, traders were convinced the rate-hike cycle was over.

Markets were pricing in a 60% chance of a rate cut by the March meeting compared with 21% just over a week ago, according to the CME’s FedWatch tool. The U.S. dollar index, which tracks the currency against six major counterparts, was last hovering around Friday’s close at 103.28. U.S. data remains the “primary driver” of the G10 currencies, making non-farm payrolls the “most important risk event” this week, said Kyle Rodda, senior financial market analyst at The closely-watched November jobs report will be released on Friday. “What we are seeing is the pricing out of U.S. economic exceptionalism, compounded by an unwinding of stretched long positioning in the U.S. dollar.”

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That means dollar pairs could continue to get a boost depending on U.S. economic data, Rodda said. Against the yen, the dollar was fetching $146.58 yen, after falling to 146.24 earlier in the session, its lowest since Sept. 11. The yen has recently pulled away from the near 33-year low of 151.92 per dollar touched in the middle of November. The Australian dollar rose to a fresh four-month high against the greenback of $0.669, while the kiwi ticked up to as high as $0.6222, its strongest level since late July. Sterling was last trading around $1.2682, easing off a three-month high against the greenback of $1.2733 hit last week.

Currency markets could also be swayed this week by speeches from several European Central Bank officials ahead of a slew of economic data from the region, including revised third quarter gross domestic product data for the euro bloc on Thursday. Euro zone inflation fell to 2.4% in November, data showed last week, providing fresh fuel to bets that the ECB will cut interest rates quicker than the bank has been suggesting. The euro was mostly flat on Monday at $1.0874 after ticking down to as low as $1.0829 in the wake of last week’s inflation data.

President Christine Lagarde is slated to give a speech later on Monday. “Lagarde will certainly welcome last week’s Eurozone CPI report but I doubt she will entertain the idea of ECB rate cuts yet,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia, adding that the eurozone labour market is still tight. Elsewhere in cryptocurrencies, bitcoin touched the $40,000 level for the first time in almost a year and a half on bets that U.S. regulators will soon approve stock-market traded bitcoin funds.

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British Pound

Reuters: Sterling rose to a near 16-week high against a broadly-soft dollar on Thursday, with currency traders looking past gloomy British manufacturing data for now. The pound was last up 0.8% against the dollar at $1.2157, its highest level since Aug. 12, breaching the previous high of $1.2153 touched on Nov. 24. Sterling was also 0.6% higher versus the euro at 85.865 pence per euro. “There is not a great deal happening domestically, it’s a very dollar-focused week, particularly after Powell’s comments yesterday,” said Adam Cole, head of FX strategy at RBC Capital Markets.

The dollar fell more than 1.5% to a three-month low against the yen on Thursday after U.S. Federal Reserve Chair Jerome Powell said U.S. rate hikes could be scaled back “as soon as December”. The pound has recovered ground from lows hit in September in the aftermath of then-Prime Minister Liz Truss’ mini-budget. Despite the uptick in recent months, the pound remains 10.3% lower on the year and traders are still focused on Britain’s gloomy economic outlook. Data on Thursday meanwhile showed British manufacturing activity falling for a fourth month in a row in November as businesses faced the weakest overseas demand in 2-1/2 years, leading to job cuts and reduced confidence about the year ahead.

“Our longer term outlook for sterling is still negative and that is driven by the imbalances and the need for capital inflows, and all the reasons that have been there for some time,” said Cole. Inflation in the UK is still running at a four-decade high as households grapple with a cost-of-living crisis. Meanwhile the Bank of England has been hiking interest rates since late 2021, tasked with bringing inflation back to its 2% target. Money markets are fully pricing in a 50-basis-point rate hike at the BoE’s Dec. 15 meeting.

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South African Rand

Reuters: South Africa’s rand strengthened against the dollar on Friday, reversing its losses from the previous day, as U.S. Federal Reserve Chair Jerome Powell said the Fed would move “carefully” on interest rates. At 1619 GMT, the rand traded at 18.6150 against the dollar, about 1.2% stronger than its previous close. The dollar was last trading flat against a basket of global currencies, after falling in the wake of Powell’s comments. Powell reaffirmed the U.S. central bank’s intent to be cautious in its upcoming monetary policy decisions, but also said it was too early to declare the Fed’s inflation fight finished.

South Africa handed state-owned rail and ports firm Transnet a 47 billion rand ($2.5 billion) lifeline on Friday, which it said would help Transnet meet its immediate debt obligations. Transnet’s single $1 billion international bond, which matures in 2028, rose on the news, with its price up as much as 1.8 cents to 98.9 cents, its highest price since Aug. 1 according to Tradeweb data. The logistics utility’s underperformance has impacted commodity exports and other sectors such as manufacturing and retail, weakening Africa’s most advanced economy.

On the stock market, both the Top-40 index and the broader all-share index ended the day about 0.2% higher. South Africa’s benchmark 2030 government bond was unchanged, with the yield at 9.980%.

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Global Markets

Reuters: Asian shares were mixed on Monday while gold spiked to all-time peaks above $2,100 at the start of a busy week for economic data that will test market wagers for early and aggressive rate cuts from major central banks next year. In particular, the U.S. November payrolls report on Friday needs to be solid enough to support the soft-landing scenario, but not so strong as to threaten the chance of easing. Median forecasts are for payrolls to rise 180,000, keeping unemployment steady at 3.9%. Many analysts suspect risks are to the upside, with Goldman Sachs tipping 238,000 including a chunk of workers returning from strikes, and a jobless rate of 3.8%.

There was also still a risk the Israel-Hamas war could widen into a broader conflict with three commercial vessels coming under attack in the southern Red Sea. MSCI’s broadest index of Asia-Pacific shares outside Japan was still up 0.4%, led by gains in South Korea and Australia. Japan’s Nikkei dipped 0.4% as the yen extended recent gains. Chinese blue chips eased 0.2%, while the country’s central bank set another firm fix for the yuan. Trade figures for China are due later in the week with the recent trend being softening exports to the U.S. overshadowing gains in Asia.

EUROSTOXX 50 futures and FTSE futures were a fraction firmer. S&P 500 futures dipped 0.1%, after finishing at a 20-month high on Friday, while Nasdaq futures lost 0.2%. The S&P 500 is up 19% for the year so far and just 4% away from its all-time peak. The latest surge was stoked by wagers the next move by the Federal Reserve will be to cut rates, with Fed Chair Jerome Powell on Friday declining the opportunity to push back hard against aggressive market pricing. Futures now imply a 71% chance the Fed will ease as soon as March, up from 21% a week ago, and are pricing in around 135 basis points of cuts for all of 2024.

The turnaround in Treasuries has been nothing short of astonishing as two-year yields fell 41 basis points in just a week, the best performance since the mini-crisis in U.S. banks back in March. So it was no surprise that some profit-taking emerged on Monday and nudged yields on 10-year notes up to 4.24%, still a long way from the October top of 5.02%. “Our baseline scenario is for a soft landing for the U.S. economy, with positive but below-potential sequential growth for the next six quarters,” said BofA global economist Claudio Irigoyen.

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Published by the Mercury Team on 4 December 2023

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