Dollar was stuck near two-month low; Kiwi gains on RBNZ surprise

Reuters: The U.S. dollar was stuck near two-month lows on Wednesday as weak economic data bolstered views that the Federal Reserve is near the end of its tightening cycle, while the New Zealand dollar jumped after a larger-than expected interest rate hike.

US Dollar was stuck near two-month lows

New Zealand’s central bank raised interest by 50 basis points to a more than 14-year high of 5.25% in a move that surprised markets, as 22 of 24 economists in a Reuters poll had forecast just a 25 bps hike. The kiwi rallied 1% to touch a two-month high of $0.6383 after the decision. It was last up 0.55% at $0.635. Christopher Wong, a currency strategist at OCBC, said the central bank’s stance was that near term inflationary pressures have increased and inflation is still too high and persistent, adding the hike brings the tightening cycle closer to an end. Elsewhere, data overnight showed U.S. job openings dropped to their lowest level in nearly two years in February, suggesting that labour market conditions were finally easing.

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Job openings, a measure of labour demand, were down 632,000 to 9.9 million on the last day of February, the monthly Job Openings and Labor Turnover Survey, or JOLTS report, showed. Economists polled by Reuters had forecast 10.4 million openings. The dollar index , which measures the currency against six peers, eased to a fresh two-month low of 101.43, after dropping 0.5% overnight. It was last at 101.57. The euro was flat at $1.0953, below the two-month peak it touched on Tuesday. Sterling was last at $1.2483, down 0.13% on the day, easing away from the ten month high it scaled on Tuesday. “The market is still looking at the U.S. data very closely. The market is very se

nsitive to how well the U.S. growth outlook is holding up in light of the banking stress,” said Moh Siong Sim, currency strategist at Bank of Singapore. The softer-than-anticipated U.S. jobs data led to the markets tweaking its outlook for rate hikes. Markets are now pricing in a 59% chance of the Fed standing pat on interest rates at its next policy meeting in May, CME FedWatch tool showed. Markets were pricing in a 43% chance of Fed not raising interest rates a day earlier.

A report last week showed that while inflation ebbed in February, it remained high enough to possibly compel the Fed to raise interest rates one more time this year. “I think if you take away all the concerns about U.S. growth as a result of banking stress and just look objectively, the data seems to say that (it) is going in the right direction, but is still not quite there yet,” said Bank of Singapore’s Sim. “And the Fed may have to perhaps do more and keep rates high for longer.” At their March policy meeting, most Fed policymakers signalled they expected to need to raise rates one more time, to 5.1%, and not cut them until 2024. Federal Reserve Bank of Cleveland President Loretta Mester said on Tuesday that while the economy appears on a path toward slowing down, the central bank likely has more rate rises ahead of it. A Reuters poll of foreign exchange strategists showed that the U.S. dollar will likely weaken against most major currencies in 2023 as the interest rate gap with its peers narrows, putting the U.S. currency on the defensive after a multi-year run.

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“Focus will turn to Friday’s key employment report, where the consensus is picking a further moderation in non-farm payrolls growth to 240K,” Rodrigo Catril, a senior currency strategist at National Australia Bank. In the U.S. bond market, the two-year Treasury yield, which typically moves in step with interest rate expectations, up 2.8 basis points at 3.862%, after sliding 14 basis points on Tuesday. The yield on 10-year Treasury notes was up 1.3 basis points to 3.350%, having slipped 9 basis points overnight. The Australian dollar fell 0.09% to $0.675, a day after Reserve Bank of Australia left its cash rate unchanged at 3.6%, snapping 10 straight hikes, saying it needed more time to assess the impact of past increases.

British Pound

Reuters: Sterling surged on Tuesday, breaking above $1.25 for the first time since June as traders turned bullish on a currency still trading well below 2016 levels, despite a Bank of England policymaker suggesting rate cuts may soon be on the cards. After falling 10.6% in 2022, sterling is the best performing G10 currency this year, up 3.4%, despite a bleak economic outlook for Britain. But it is still 15.5% below its 2016 levels, before Britain voted to leave the European Union. BoE monetary policymaker Silvana Tenreyro said on Tuesday the central bank would probably need to start cutting interest rates sooner than previously thought, but that didn’t stop the sterling rally. The pound was last up 0.52% at $1.2483, after touching its highest level since June, $1.2521, at 0953 GMT.

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“Against a blank backdrop of economic releases and some dovish comments from the usually dovish BoE MPC member Tenreyro, a major bull move in the pound is developing here,” said Shaun Osborne, chief currency strategist at Scotiabank. He added that technicals point to “solid-looking bull trend signals on the short, medium and long-term”. Sterling has become the biggest beneficiary of markets rates repricing this year, with the U.S. currency continuing to be hurt by traders expectation that the end of the U.S. rate-hiking cycle is near. Supporting sterling’s rally are expectations for more rate hikes from the BoE, said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

Analysts said the market will be interested in a speech, entitled “Inflation, persistence and monetary policy” from BoE Chief Economist Huw Pill, due at 1430 GMT, for indications on the central bank interest rate trajectory. “We would be wary of maintaining such levels (above the $1.25 threshold) unless BoE Chief Economist Pill validates what is currently priced into the UK rates strip,” Stretch said. According to Refinitiv, money markets currently expect the BoE to raise rates by another 25 basis points in May to 4.50%, before it stops tightening monetary policy. Markets are not pricing in rate cuts this year. Against the euro, sterling rose 0.5% to 87.33 pence and was set for its biggest daily jump in three weeks.

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South African Rand

Reuters: South Africa’s stocks jumped on Tuesday while the rand slipped after a decision by major oil producers to reduce supply on Sunday, which triggered concerns about a slowdown in global economic growth. The Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, announced they would reduce their oil supply by about 1.16 million barrels per day. “The production cut announcement by OPEC+ has brought back inflation and recessionary fears into the market, leaving risk sensitive currencies like the rand exposed,” IG analyst Warren Venketas told Reuters, adding the weaker rand contributed to the strength of the local bourse.

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Both the blue-chip Top 40 index and the benchmark all-share index closed more than 1% higher, led by a gain of almost 1.6% in the resources index. “Mining companies … surged towards the latter end of the trading day,” Venketas said. At 1559 GMT, the rand was down 0.76% at 17.9450 against the dollar. The government’s benchmark 2030 bond ZAR2030= was weaker, with the yield up 1.5 basis points to 9.88%.

Global Markets

Reuters: Stocks struggled to make headway on Wednesday, the dollar nursed losses and bonds clung to gains, as signs of a slowing U.S. labour market made investors nervous about the economic outlook, while a bigger-than-expected rate hike lifted the kiwi dollar. Asia trade was thinned by holidays in Hong Kong and China, leaving MSCI’s Asia-Pacific index excluding Japan faring little better than flat, while Japan’s Nikkei fell 1.6% and was set for the biggest one-day percentage fall since mid-March. Futures indicated European markets were set for a broadly lower open, with Eurostoxx 50 futures down 0.26%, German DAX futures down 0.12%. FTSE futures however were up 0.04%. Overnight a four-day winning streak for Wall Street indexes ended, with all three major indexes dropping, and interest rate expectations were dialled down after data showed U.S. job openings hit their lowest level in nearly two years in February.

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Two-year treasury yields , which closely track short-term rate expectations, dived almost 15 basis points and the dollar tracked the move to hit two-month troughs. “The market’s odds of a recession have increased,” said Jamie Dimon, chief executive of the United States’ biggest bank, JPMorgan Chase & Co, in a letter to shareholders, warning the confidence fears that have rattled banks have not dissipated. “The current crisis is not yet over,” he said. “And even when it is behind us, there will be repercussions from it for years to come.” U.S. interest rate futures have rallied strongly over the last few weeks, as traders figure that under pressure banks will tighten up on lending anyway and save the need for monetary policymakers to do the job. The latest futures pricing implies a better-than-even chance that the Federal Reserve has finished raising rates, and more than 60 bps in cuts this year.

Two-year yields are at 3.864% and 10-year yields at 3.352%, with the whole U.S. yield curve below top of the Fed funds rate window, which is at 5%. Gold , which pays no yield, hit a one-year high above $2,000 an ounce overnight. It was last up 0.2% at $2,023.27 an ounce. U.S. gold futures gained 0.16% to $2,025.40 an ounce. “Perhaps the Fed sneaks one more hike in, but the distribution of probabilities around the policy rate are heavily skewed to the downside,” said NatWest Markets head of economics and market strategy, John Briggs. “We do not think this is something that is going to change in market pricing anytime soon.” Outside the United States, markets see other central banks staying the course on hikes to tame inflation. A Reuters poll of FX strategists found most expect that to keep pressure on the dollar this year.

The Reserve Bank of New Zealand surprised traders with a 50 basis point hike on Wednesday that sent the kiwi up 1% at one stage to hit a two-month high – a contrast with Australia’s central bank, which paused its hikes on Tuesday.

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Elsewhere investors see a few more rate hikes in store in Europe, where German exports have turned surprisingly strong. The euro flat at $1.0952, just shy of a two-month high it hit overnight on the dollar at $1.0973. The kiwi was last up 0.60% at $0.635. China and Asia more broadly are the great hopes for growth. Japanese data on Wednesday showed services activity grew at its fastest pace in more than nine years in March though factory output remains weak. China’s sprawling manufacturing sector lost momentum in March, data showed earlier in the week, though investment inflows hit a record for the first quarter on foreigners’ optimism that policy support for business lies ahead. Commodity markets are settling after Monday’s surge in oil prices on news of surprise OPEC+ production cuts. U.S. crude rose 0.4% to $81.03 per barrel, while Brent was at $85.31, up 0.44% on the day.

Published by the Mercury Team on 5 April 2023

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