Dollar was steady as China disappoints: Rand strengthened

Reuters: The dollar was steady through Asia trade on Monday, following five straight weeks of gains, as investors looked ahead to the Federal Reserve’s Jackson Hole symposium for guidance on where rates might settle when the dust of this hiking cycle clears.

U.S. Dollar steady on Monday

The U.S. dollar made a gain of 0.7% on the euro last week, inched ahead on the yen and surged by more than 1% on the Antipodean currencies as U.S. Treasury yields leapt in anticipation of interest rates staying higher for longer. In Asia, the Australian dollar , at $0.6406, and the New Zealand dollar , at $0.5919, were pinned uncomfortably close to last week’s nine-month lows after China’s rate cut disappointed markets worried about a stalling economy.

China cut its one-year benchmark lending rate by 10 basis points and left its five-year rate unchanged, against economists’ expectations for 15 bp cuts to both. The yuan slid to the weak side of 7.3 per dollar despite a firm fixing of its trading range by the central bank. It last traded at 7.3070, though it has so far kept off last week’s lows beyond 7.31 that had brought state banks into spot markets in London and New York hours as buyers.

The Antipodean currencies often function as a liquid proxy for the yuan, owing to the region’s exports to China, and are doubly vulnerable as the rate outlook drives up the greenback. “The Australian dollar will continue to underperform this week in our view,” strategists at the Commonwealth Bank of Australia said in a note to clients. “We consider there is a growing risk that the Aussie dips below $0.60 before year-end. It will likely take a big Chinese stimulus package focused on commodity-intensive infrastructure spending to turn around the downtrend.”

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Like the yuan, the yen is also on intervention watch, having fallen to levels around which authorities stepped in last year. It was steady at 145.37 a dollar in Asia. The euro held at $1.0880. Sterling hovered at $1.2739. The Swiss franc was just above a six-week low hit last week at 0.8820 per dollar. Apart from waiting in vain for news of stimulus in China, the upcoming Jackson Hole symposium – where Fed chair Jerome Powell is set to speak on Friday – is markets’ major focus and may set the direction for U.S. yields.

Ten-year yields rose 14 basis points for the week and touched a 10-month high of 4.328%, within a whisker of a 15-year high. Thirty-year yields rose nearly 11 bps to their highest in more than a decade. The theme this year for the annual gathering in Wyoming is “structural shifts in the global economy”. “Two things that may come across are: decades of ultra-low rates backed by ultra-low inflation may be over,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “And global policy-makers may prefer to maintain restrictive real rates for a while, thereby keeping risks from volatile inflation alive.” Bitcoin , which was battered to a two-month low last week as rising U.S. yields and China’s slowing economy drove a wave of selling, nursed those losses at $26,054.

British Pound

Reuters: The pound softened on Friday as gloomy market sentiment sent investors to the safe haven of the U.S. dollar, and British retailers reported a bigger-than-expected drop in sales in July. Official data showed British sales volumes last month were 1.2% lower than in June, as heavy rain put off shoppers who are also feeling the hit from high inflation and 14 back-to-back increases in interest rates. Economists polled by Reuters had forecast a 0.5% drop. The pound was last 0.16% lower against the dollar at $1.2727 snapping three days of gains, and also weakened against the euro, which rose 0.18% to 85.46 pence. Sterling reached its strongest in a month on Thursday at 85.24 per euro.

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Recent British data, including GDP and wage numbers, has come in stronger than expected, driving market expectations for more Bank of England interest rate hikes. These signs of economic resilience at a time when inflation remains sticky mean markets are nearly pricing in a 6% peak for the UK benchmark rate, which currently stands at 5.25%. Expectations that BoE tightening will continue for longer than at the U.S. Federal Reserve and European Central Bank, which may have finished their rate hiking cycles, have supported the pound this year.

Friday’s soft retail sales data seems unlikely to disrupt this narrative significantly. “Slowing retail sales would normally be seen as a sign of consumer stress, but this feels more like a weather-related blip and it’s unlikely the Bank of England will give these numbers anything more than a cursory glance when it comes to next month’s interest rate decision,” said Danni Hewson, head of financial analysis at AJ Bell. The pound was still set to post a weekly gain of 0.32% against the dollar.

South African Rand

Reuters: The South African rand strengthened on Friday, ahead of monthly inflation data and a BRICS summit of emerging economies in Johannesburg this week. At 1516 GMT, the rand traded at 18.9350 against the dollar, about 0.8% stronger than its Thursday close. However, the rand is down roughly 6% this month, with Rand Merchant Bank analysts saying local markets were “almost a passenger at the moment,” with global factors holding sway. The rand fell earlier in the week on mounting concerns over economic growth in its biggest trading partner China.

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Investors will be closely watching South Africa’s July inflation figures due on Wednesday for clues on the health of the local economy. Focus will also be on the leaders of BRICS nations – Brazil, Russia, India, China, South Africa – who meet in an annual summit from Tuesday to Thursday, with discussions on the expansion of the bloc high on the agenda.

Shares on the Johannesburg Stock Exchange fell, with the blue-chip Top-40 index closing over 1.8% lower. The benchmark 2030 government bond was weaker, the yield down 5 basis points to 10.470%.

Global Markets

Reuters: Asian stocks stumbled on Monday after China delivered a smaller cut to lending rates than markets had counted on, continuing Beijing’s run of disappointingly frugal stimulus steps. China’s central bank trimmed its one-year lending rate by 10 basis points and left its five-year rate unmoved, a surprise to analysts who had expected cuts of 15 basis points to both. Disappointment at the meagre move saw Chinese blue chips ease 0.4% to the lowest in almost nine months, while the Australian dollar took a brief dip as a proxy for China risk.

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Investors have been hoping for a repeat of the massive fiscal spending that has juiced the economy in the past, even though Beijing seems reluctant to add to its borrowing tasks. Indeed, there was chatter in the market that the authorities skipped a cut in the five-year rate precisely because there was more significant action on the way. Sentiment was also helped by a rush of Chinese companies outlining plans for share buybacks as regulators voiced support for the moves.

MSCI’s broadest index of Asia-Pacific shares outside Japan still slipped 0.4% to a fresh low for the year, adding to a 3.9% dive last week. Japan’s Nikkei was up 0.4%, though that follows a 3.2% drop last week. EUROSTOXX 50 futures and FTSE futures both edged up 0.1%, while S&P 500 futures and Nasdaq futures were near flat. Earnings from AI-darling Nvidia on Wednesday will be a major test of valuations.

Analysts are concerned the market has got too long, especially of tech, leaving it vulnerable to a deeper pullback. BofA’s latest survey of fund managers found sentiment was the least bearish since February 2022, while cash levels were at nearly a two-year low, and 3 out of 4 surveyed expect a soft landing or no landing for the global economy. Analysts at Goldman Sachs, meanwhile, argue there is still scope for investors to add to equity positions. “The re-opening of the buy-back blackout window will provide a boost to equity demand in coming weeks although a flurry of expected equity issuance this fall may provide a partial offset,” they wrote in a note.

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Stock valuations have been pressured in part by a sharp rise in bond yields, with the U.S. 10-year hitting 10-month highs last week at 4.328%. Early Monday, yields were up again at 4.28% and a break above 4.338% would take them to levels not seen since 2007. Markets assume Federal Reserve Chair Jerome Powell will note the jump in yields at the Jackson Hole conference this week, and the recent run of strong economic data. The Atlanta Fed’s GDP Now tracker is running at a heady 5.8% for this quarter.

“It’s an opportunity for Powell to give an updated assessment on economic conditions, which now appear stronger than anticipated and reinforce the case for additional rate hikes,” Barclays analyst Marc Giannoni said. “Even so, we would be surprised if he provided specific guidance, with key August prints for employment, CPI and retail sales all to come before the September meeting.” A majority of polled analysts think the Fed is done hiking, while futures imply around a 31% chance of one more increase by December.

The rise in yields has helped the dollar notch five weeks of gains and a nine-month top on the Japanese yen at 146.56 . On Monday, it was trading at 145.36 with the market wary of risk of Japanese intervention. The euro was also firm at 158.14 yen , but under pressure from the dollar at $1.0881 after losing 0.7% last week. The ascent of the dollar and yields was weighing on gold at $1,891 an ounce , having touched a five-month low last week.

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Oil prices edged higher on Monday, having snapped a seven-week winning streak as concerns about Chinese demand offset tight supplies. Brent was up 52 cents at $85.32 a barrel, while U.S. crude bounced 62 cents to $81.87 per barrel. Prices for liquefied natural gas were underpinned by the risk of a strike at Australian offshore facilities that could affect around 10% of global supply.

Published by the Mercury Team on 21 August 2023

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