Dollar inched higher; Sterling hovers near one-year high

Reuters: The dollar inched higher on Tuesday after a loans survey showed U.S. credit conditions were less gloomy than expected, while the pound flirted with a one-year peak on expectations that the Bank of England will raise interest rates this week.

US Dollar inched higher

In Asia, trade data released on Tuesday showed that China’s imports dropped 7.9% in April from a year earlier, while exports grew at a slower pace of 8.5% in the same period after an unexpected surge of 14.8% in March. The yuan showed little reaction. The offshore yuan last traded 0.1% lower at 6.9287 per U.S. dollar. A day earlier, the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey showed that while credit conditions for U.S. business and households continued tightening at the start of the year, it was likely due to the impact of the Fed’s aggressive rate hikes rather than severe banking sector stress. The closely-watched survey released on Monday was among the first measures of sentiment across the banking sector since the recent run of bank failures, sparked by Silicon Valley Bank’s collapse in March.

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The U.S. dollar rode Treasury yields modestly higher after the survey, as traders pared back their expectations on the scale of Fed rate cuts needed later this year to ease the stress on the sector. The euro was last 0.13% lower at $1.0990, while the Japanese yen rose about 0.05% to 135.04 per dollar, marginally aided by comments from Bank of Japan Governor Kazuo Ueda. Ueda said on Tuesday the BOJ will end its yield curve control policy and then start shrinking its balance sheet, once prospects heighten for inflation to sustainably hit its 2% target. Two-year U.S. Treasury yields sat just below 4%, having risen above that level for the first time in about a week on Monday. The benchmark 10-year yield was last at 3.4995%, after rising more than five basis points in the previous session. “The survey wasn’t as bad as expected. There’s still a tightening in credit conditions that is coming, but overall, at this stage, the survey is not depicting a credit crunch ahead. And I think that was good news,” said Rodrigo Catril, a currency strategist at National Australia Bank.

Against a basket of currencies, the U.S. dollar index rose 0.03% to 101.47, though remained not far from recent lows as traders eye a peak in U.S. interest rates. “The dollar didn’t really get much of a kick,” said Catril. “If anything, it’s been the outperformance of pro-growth currencies, which has been lifted by the improvement in commodity prices, I think that’s been the bigger mover.” Oil prices had risen over 2% on Monday, as fears of an imminent recession in the United States eased following the release of the SLOOS and Friday’s robust jobs report. Commodity currencies like the Australian and New Zealand dollars slipped in Asia trade on Tuesday, but held near their multi-week peaks reached in the previous session. The Aussie was last 0.05% lower at $0.67775, after having risen to a roughly three-week top of $0.6804 on Monday. The kiwi fell 0.2% to $0.6332, having similarly scaled a one-month high of $0.63585 the day earlier. Elsewhere, the British pound slipped 0.03% to $1.2614, but was not far from the previous session’s one-year peak of $1.2668, ahead of Thursday’s central bank policy meeting.

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The Bank of England looks set to raise interest rates to 4.5%, as it tries to fight the highest inflation of any big advanced economy. “The BoE has been sort of this reluctant hiker, they keep on saying that they expect inflation to ease and that they’re concerned about the cost of living and the slowdown in the economy,” said NAB’s Catril. “Yet, the reality is that the UK economy has proven to be quite resilient this year … the important thing will be the messaging out of what the bank says.”

South African Rand

Reuters: South Africa’s rand firmed and stocks rose on Monday, with the dollar slightly weaker on bets that U.S. interest rates have peaked. At 1541 GMT the rand traded at 18.2925 against the dollar, up about 0.7% from its closing level on Friday. The dollar was down about 0.1% against a basket of major currencies. Analysts said they expected the rand would mainly respond to global drivers this week, with the domestic data calendar relatively light. The most likely local catalysts are expected on Thursday, with the release of March mining and manufacturing production numbers.

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Data on Monday showed South Africa’s net foreign reserves rose to $55.370 billion at the end of April, from $55.229 billion in March, though there was little impact on the rand. On the stock market, the blue-chip index of top 40 companies ended up 0.62% while the broader all-share index closed 0.56% higher. South Africa’s benchmark 2030 government bond was slightly weaker, with the yield up 3 basis points at 10.160%.

British Pound

FX Street: The Pound Sterling, the oldest currency in the world, trades above the 1.26 handle versus the US Dollar on Monday, ahead of key data this week in the form of US inflation data and the Bank of England policy meeting later in the week. The Pound Sterling is benefitting from a perceived monetary policy divergence with the US Dollar. Interest rates in the US may have peaked unlike in the UK where persistently high inflation coupled with robust data continues to suggest the BoE will need to do more to get inflation under control. Since global investors are always looking to park their money where it can earn the highest return, this favors GBP.

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In the US the Fed has released its bank Lending Officer Survey, which has shown a tightening in credit conditions following the banking crisis in March. The report suggests firms may find it more difficult to access credit in the future which could limit growth in the world’s largest economy. The US Dollar seems to be holding up well after the report, despite the negative news, perhaps benefiting from a safe-haven bid. From a technical perspective, GBP/USD continues to make new highs in a broadly bullish long-term uptrend. Given the old adage that “the trend is your friend” this advantages long over short holders.

Global Markets

Reuters: An index of Asian stocks eased back from more than two-week highs on Tuesday as traders squared positions heading into a key U.S. inflation report, although mainland Chinese shares and Japanese equities bucked the trend. The dollar ticked higher against major peers as U.S. yields remained elevated amid increased confidence that the banking sector is not headed for a wider crisis. MSCI’s broadest index of Asia-Pacific shares outside Japan, though, slipped 0.3%, erasing part of Monday’s 0.9% rally. Hong Kong’s Hang Seng dropped 0.4%, while Australia’s benchmark lost 0.2% and South Korea’s Kospi declined 0.4%. Japan’s Nikkei jumped 0.8%, led by a surge for steelmakers after JFE Holdings forecast higher profit. Mainland Chinese blue chips gradually gained strength after an indifferent start to last be 0.5% higher. Investors were mostly unmoved by Chinese data showing exports surged last month while imports eased. U.S. S&P 500 E-mini futures signaled a slight decline at the reopen after the equity benchmark ended little changed on Monday.

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Investors are keenly focused on Wednesday’s U.S. consumer inflation report after Federal Reserve chair Jerome Powell said last week that policy decisions will be “driven by incoming data,” while signaling a likely pause in the rate hiking cycle. At the same time, Friday’s robust payrolls report prompted investors to dial back expectations for the timing and size of the Fed’s first rate cut. Money markets currently expect two quarter point rate cuts by year-end, with a risk of a third. Economists forecast a slight moderation in the headline inflation number to 5.5% annually for April, matching February’s print, which was the lowest since the end of 2021. “The surprise lies on the downside” for the inflation data, particularly the risk of a drop below 5%, said Tony Sycamore, a market analyst at IG markets. “If we were to get a 4 print, I think you’re going to get a great deal of fanfare, at least in the initial instance,” with U.S. equities likely to push back to the top of recent ranges, he said.

At the same time, Sycamore cautioned against becoming too sanguine on the U.S. banking sector, after the market’s mood was lifted by a Fed survey of lenders that suggested no imminent credit crunch. U.S. Treasury Secretary Janet Yellen said overnight that regulators stand ready to mobilize the same tools used in recent bank rescues if necessary. “It looks like they are trying to put out the fires for now, but whether they’ve managed to fully extinguish what’s going on, I don’t think that’s going to happen to be honest,” Sycamore said. The debt ceiling standoff gives another reason for caution, with Yellen warning that failure to lift the debt limit would cause a huge hit to the U.S. economy and weaken the dollar as the world’s reserve currency. The dollar index, which measures the currency against six major peers, was little changed after earlier rising overnight from near the bottom of its trading range since the middle of last month.

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The 10-year Treasury yield eased off a one-week high in Tokyo to last sit around 3.5%. Nerves before the U.S. CPI data also ruled in commodity markets. Spot gold prices eased slightly to around $2,020 per ounce. Oil prices slipped, paring strong gains from the previous two sessions. Brent crude declined 31 cents to $76.70 and U.S. West Texas Intermediate crude lost 23 cents to $72.92.

Published by the Mercury Team on 9 May 2023

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