Dollar steady on higher-for-longer rate outlook; yen wobbles.

Reuters: Sterling eased against the dollar and the euro on Thursday, shaking off hawkish remarks by a Bank of England policymaker.

BRITISH POUND

 By 12:00 GMT, the pound was 0.1% lower against the dollar at $1.203 and 0.1% weaker against the euro as well at 88.15 pence. Bank of England Monetary Policy Committee member Catherine Mann said that it was too soon to say the risks posed by the surge in inflation last year had eased and the central bank should continue to raise borrowing costs. “It’s not necessarily the stance that the overall committee is taking, they are looking at the hard data, which at the moment is still quite constructive,” said Simon Harvey, head of FX analysis at Monex Europe.

“I think a lot of the impact has been softened by the fact that this is nothing new from Catherine Mann.” Positive economic signals from a PMI survey earlier this week raised the likelihood of another Bank of England interest rate rise in March, with the market now pricing in a 95% chance of a 25 bps rate hike, after which it is expected to halt hiking rates. Recent positive economic indicators bring into focus the BoE’s tricky task of bringing down inflation while avoiding a deeper downturn in the UK.

“If the Bank of England does take the rate to 4.5% or above, is that necessarily positive for the currency if all of a sudden it tips the UK economy back into a recession?” said Harvey. The bank rate is currently 4% following 10 increases in a row by the central bank since late 2021. The BoE’s next meeting is scheduled for March 23.

US DOLLAR

Reuters: The dollar was set for its fourth straight week of gains as investors braced for U.S. interest rates to be higher for longer, while the yen was volatile, with incoming Bank of Japan Governor Kazuo Ueda saying it was appropriate to keep ultra-loose monetary policy. Data overnight showed that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, underscoring a still-tight labour market and a resilient U.S. economy. Strong U.S. economic data and hawkish rhetoric from Fed officials this month have resulted in the dollar erasing its year to date losses as investors digest the prospect of the Fed staying on its monetary tightening path for longer. The dollar index , which measures the U.S. currency against six other rivals, was at 104.54 on Friday, hovering around the near seven-week high of 104.78 it touched on Thursday. The index is now up 2.5% for the month.

Rodrigo Catril, senior currency strategist at National Australia Bank, said the jobless claims data continues to suggest the U.S. labour market remains in rude health. “The conclusion from the U.S. overnight data is that the Fed still has more work to do.” The market is pricing U.S. rates to peak in July at 5.34% and remain above 5% till the end of the year, having walked back expectations of a deep rate cut this year. Investors’ attention will be firmly the U.S. personal consumption expenditures price index for January, the Fed’s preferred inflation measure. The index, due to be released later on Friday, is expected to be up 0.4% on a month-on-month basis. Meanwhile, the euro was up 0.04% at $1.0599 and was set to end the week nearly 1% lower. Sterling was last trading at $1.2018, up 0.04%. The Australian dollar rose 0.10% to $0.681. The kiwi advanced 0.06% to $0.623.

Incoming BOJ chief Ueda, who was nominated earlier this month in a surprise move, took the centre stage in early Asian hours as he spoke at the lower house confirmation hearing. Ueda warned that uncertainties regarding Japan’s economic recovery remained “very high”, warranting the BOJ maintaining its ultra-loose monetary policy. The yen was volatile through the day and swung between gains and losses against the dollar. The Asian currency strengthened 0.03% to 134.68 per dollar. “His neutral comments, coming against market’s hawkish expectations and together with the rising global yields, suggest the yen could embark on a weakening trend again once we are past this volatility,” said Charu Chanana, market strategist at Saxo Markets in Singapore. Japan’s core consumer inflation hit a fresh 41-year high in January, according to data on Friday, putting renewed pressure on the central bank to phase out its massive stimulus programme.

The surprise choice of Ueda as the next BOJ governor stoked expectations that the end to the unpopular yield curve control (YCC) policy was around the corner. Analysts said Ueda’s comments were not a surprise, noting that he stuck to BOJ’s current stance. OCBC currency strategist Christopher Wong said Ueda was likely to adopt a gradual and moderate approach as he monitors further data to get a better gauge of economic conditions in Japan. “It is still early days to form an impression of his policy leaning at this point.” In the latest Reuters poll, two-thirds of BOJ watchers expect the central bank to start unwinding its ultra-loose policy either in April or June. Still, a majority said Japan’s negative interest rate policy was likely to stay at least until the second half of 2024.

SOUTH AFRICAN RAND

Reuters: The South African rand edged lower against the U.S. dollar on Thursday, losing all the ground gained in response to the finance minister’s budget speech the previous day. At 15:57 GMT, the rand traded at 18.2775 per dollar, 0.14% lower than its previous close. It had strengthened to 18.1250 on Wednesday after the government said it will take on more than half of state utility Eskom’s debt amid South Africa’s worst power cuts on record. The rand has been one of the worst-performing emerging market currencies this year. “Unfortunately, the budget announcement did not offer as much relief to the ZAR as many might’ve hoped,” ETM Analytics said in a research note.

One factor weighing on the currency is that the Financial Action Task Force (FATF), which sets standards on combating money laundering and illicit financing, could add South Africa to its “grey list” at meetings on Friday, ETM said. Being added to the FATF list would be a reputational blow to South Africa and could hurt local asset prices, as grey-listed countries are subject to greater monitoring. 

Shares on the Johannesburg Stock Exchange rose, with both the broader all-share index and top-40 index closing up about 1.1%. The government’s benchmark 2030 bond was stronger, with the yield down 4 basis points at 10.115%.

GLOBAL MARKETS

Reuters: Asian share markets were dragged lower by the slide in Chinese stocks on Friday, though investors took heart from the incoming head of Japan’s central bank ruling out an early end to super-easy monetary policy, nudging bond yields lower globally. European share markets are set to open higher, with the pan region Euro Stoxx 50 futures up 0.4%. The S&P 500 futures , however, was flat, while Nasdaq futures were off 0.2%. During a lower house confirmation hearing, Kazuo Ueda, who will take over as governor of the Bank of Japan (BOJ) in April, said the central bank must maintain ultra-low interest rates to support the fragile economy, warning of the dangers of responding to cost-driven inflation with monetary tightening. “Overall Ueda is working hard to present himself as delivering continuity – at least to start with,” said Sean Callow, senior currency strategist at Westpac. Japan’s five-year government bond yield fell to 0.235%, from the previous close of 0.240%, while the 20-year yields eased 2 basis points to to 1.28%.

Ten-year bonds did not trade on Friday due to thin liquidly, after breaching the upper limit of BOJ’s policy cap for two straight days. Bond futures extended gains. The Nikkei share index was up 1.1%. The yen remained choppy. It reversed an early rise to be largely flat at 134.71 per dollar. Data on Friday showed Japan’s annual core consumer inflation had hit a fresh 41-year high of 4.2% in January, keeping the central bank under pressure to phase out its massive stimulus programme. Meantime, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8%, heading for a hefty weekly drop of 2.0%. In particular, Chinese blue chips tumbled 1.0% and Hong Kong’s Hang Seng Index dropped 1.3% while Australia’s resources-rich shares edged up 0.3%. On Wall Street, stocks ended a topsy-turvy Thursday in positive territory, with the Dow Jones Industrial Average up 0.33%, the S&P 500 gaining 0.53% and the Nasdaq Composite adding 0.72%.

Investors were bracing for the release on Friday of the U.S. personal consumption expenditures (PCE) price index for January, the Federal Reserve’s preferred inflation measure. The index is expected to be up 0.4% from a month earlier, compared with 0.3% the previous month. “The U.S. dollar index should extend its rise towards 106 if today’s US PCE deflators lift the US Treasury 2Y yield above the 4.5-4.75% Fed Funds Rate range,” said analyst at DBS Bank. “Fed officials believed that the U.S. economy was not as weak as initially feared and that disinflation was not as secure as desired.” Overnight, strong data, including an unexpected fall in new claims for unemployment and a revised uptick in the fourth-quarter PCE price index, suggested some strength in the economy. The dollar index , which measures the safe-haven dollar against six peers, was hovering at 104.56, not too far from a seven-week high of 104.78. In Treasuries, the yield on the benchmark 10-year government bonds eased to as far as 3.8590%, compared with the previous close of 3.8810%. The two-year bond yield was hovering at 4.7015%, compared with the previous close of 4.6930%.

In the oil market, Brent crude futures rose 0.8% to $82.84 while U.S. West Texas Intermediate crude was also up 0.8% at $75.99. Gold was slightly higher. Spot gold traded at $1824.89 per ounce.

Published by the Mercury Team on 24 February 2023

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