Sterling got a small lift as risk appetite picks up: Rand jumps 1%

Reuters: Britain’s pound Sterling a small lift on Tuesday, benefiting from a resurgence of risk appetite across markets as the dollar eased from its recent 10-week highs.

British Pound Sterling got a small lift

At 1046 GMT, the pound was at $1.2769 against a weaker dollar, up 0.1% on the day, and 85.255 pence per euro. Rising U.S. Treasury yields and unease over China have kept investors cautious in recent weeks, benefiting the safe-haven dollar, but this trajectory eased on Tuesday and risk-sensitive currencies gained instead, with the euro, Australian dollar and British pound all up.

Francesco Pesole, FX strategist at ING, said the pound’s rise was mostly driven by global risk sentiment. “We’re seeing European equities performing quite well today which is explaining why the pound is supported,” he said. British manufacturing output over the three months to August saw its biggest drop since September 2020, data on Tuesday showed. Data also showed Britain recorded a smaller-than-expected budget deficit in July, giving finance minister Jeremy Hunt a bit of hope that he can cut taxes later this year before an election expected in 2024. Still, some economists warned that an economic slowdown in the coming months could limit Hunt’s opportunity for pre-election giveaways.

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Sterling rose 0.4% against the dollar last week – its best week since mid-July – after data including GDP and wage numbers came in stronger than predicted, which reinforced the expectations that the Bank of England will continue to raise rates. The pound has been supported this year by investors thinking that the BoE will continue its rate-hiking cycle for longer than the U.S. Federal Reserve and the European Central Bank. On Aug. 3, the Bank of England raised interest rates for the 14th time since late 2021 in an attempt to put a lid on persistent high inflation.

Markets are pricing in a, 82% chance of the BoE delivering a 25 basis-point rate hike at its next meeting on Sept. 21. ING’s Pesole said the pound is not directly impacted by worries about China’s economy, so stands to gain. “As long as China remains the main topic for markets it’s probably not going to move a lot. The pound at the moment moves mostly on domestic data and on Bank of England rate expectations,” he said.

U.S. Dollar

Reuters: The U.S. dollar perched near a two-month peak on Wednesday as investors looked to the Federal Reserve chair’s speech this week for cues on the path of monetary policy, while the yen loitered near 146 a dollar, keeping traders guessing on any intervention. The dollar index , which measures the U.S. currency against six rivals, was at 103.55, not far from the two-month high of 103.71 it touched on Tuesday. The index is up 1.6% in August and is on course to snap its two-month losing streak. The currency market is subdued amid a lull in summer volatility and ahead of the Fed’s central bank symposium at Jackson Hole, Wyoming, this week, said currency strategist Christopher Wong at OCBC in Singapore.

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With traders reluctant to place major bets, the spotlight is firmly on Fed Chair Jerome Powell’s speech at the event, which is set for Aug. 24-26. Investors will parse through his words to gauge the Fed’s monetary policy path. A recent run of strong U.S. economic data has helped allay worries of an impending recession but with inflation still well above the Fed’s target of 2%, investors are wary that the central bank may keep interest rates in a higher range for longer. “Markets are looking out for hints of earlier policy shifts or extensions of higher for longer,” said Wong.

Richmond Fed President Thomas Barkin on Tuesday said the Fed must be open to the possibility that the economy will begin to re-accelerate rather than slow, with potential implications for the U.S. central bank’s inflation fight. Markets are pricing in an 86% chance of the Fed standing pat at its policy meeting next month, the CME FedWatch tool showed, but the odds of the U.S. central bank hiking interest rates one more time this year toward the end of the year have been rising.

The potential for additional hikes after a likely pause at its September meeting, combined with a decrease in excess savings, could weaken consumer momentum toward the end of the year, said Saira Malik, CIO at Nuveen. The yen strengthened 0.20% to 145.59 a dollar in Asian hours but was not far off the nine-month milestone of 146.565 touched last week, leaving traders on tenterhooks as they warily watch for any signs of intervention. When the dollar broke above 145 yen that triggered intervention last year, speculation began mounting that Tokyo would soon step into the market to support its currency.

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Atsushi Takeuchi, who was head of the Bank of Japan’s foreign exchange division when Tokyo intervened in 2010-2012, said Japan will forgo intervening unless the yen moves past 150 and becomes a huge political headache for premier Fumio Kishida. “Authorities usually don’t have a specific line-in-the-sand in mind. But key thresholds like 150 are important for political reasons, as they are easy to understand,” Takeuchi said. In other currencies, the euro was up 0.07% to $1.0852, inching away from the two-month low of $1.0833 it touched overnight. The Australian dollar rose 0.40% to $0.645, while the New Zealand dollar rose 0.29% to $0.596. In cryptocurrencies, bitcoin last rose 0.77% to $26,049, having touched two-month low of $25,350 overnight.

South African Rand

Reuters: South Africa’s rand jumped 1% on Tuesday after some risk appetite returned to markets due to falling U.S. Treasury yields, as the country kicked off the first day of the BRICS summit of emerging economies in Johannesburg. At 1129 GMT, the rand traded at 18.7925 against the dollar, about 0.88% stronger than its previous close. The dollar last traded flat against major peers. The rand jumped as much as 1% earlier in the day on the back of increased risk appetite as U.S. Treasury yields fell, Danny Greeff, co-head of Africa at ETM Analytics, told Reuters.

“For the rand bulls to remain in charge of the market in the coming days, U.S. Treasury yields would need to continue falling, or at least not rise further,” Greeff added. South Africa will host the leaders of Brazil, India and China for the Tuesday-to-Thursday summit, while Russian President Vladimir Putin will join virtually. Putin is not travelling to South Africa because of an international arrest warrant for alleged war crimes in Ukraine. The BRICS summit “is unlikely to provide the market with significant or sustainable momentum until the bloc adopts implementable policies,” Greeff said.

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Leaders will consider expanding membership of the BRICS grouping, as some members hope to position the bloc as a counterweight to the West. On the Johannesburg Stock Exchange, the blue-chip Top-40 index was last trading around 0.6% higher from Monday’s close. South Africa’s benchmark 2030 government bond was also firmer, with the yield down 5.5 basis points to 10.480%.

Global Markets

Reuters: Asian shares held tight ranges on Wednesday as investors awaited results from tech darling Nvidia to see if the sector’s lofty valuations can withstand a jump in bond yields, while still gloomy factory readings from Japan left sentiment fragile. S&P 500 futures climbed 0.3% while Nasdaq futures rose 0.4%. MSCI’s broadest index of Asia-Pacific shares outside Japan were up 0.1%, hovering not far away from its nine-month trough hit just two sessions ago. Japan’s Nikkei rose a meagre 0.2%. Data on Wednesday showed Japan’s factory activity shrank for a third straight month in August, offering the first glimpse into the health of global manufacturing this month. The United States will also report its flash PMI readings on Wednesday, which is likely to show the factory sector remained in contraction.

Chinese shares gave up some gains, with blue-chips off 0.7% following a rebound of 0.8% the previous day, and Hong Kong’s Hang Seng Index easing 0.1% after jumping 1%. Metal prices kept climbing for a second day, with iron ore prices gaining as much as 3.2% and coking coal futures up by a similar amount. Investors are eagerly awaiting results from chip company Nvidia NVDA.O due late on Wednesday. Its blockbuster report last quarter fueled a rally in tech stocks and artificial intelligence hopes, propelling the S&P 500 this year.

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Shares of Nvidia hit an all-time high of $481.87 overnight, with options data showing traders are expecting a larger-than-usual swing in shares after the quarterly results. Analysts expect Nvidia to forecast 110% growth in third-quarter revenue to $12.50 billion. Stuart Humphrey, an analyst at JPMorgan, said some are forecasting $14-15 billion. “This kind of number feels a touch high to me, but if it sniffs this – one could argue that into this print, it doesn’t matter if demand will eventually decline next year – it still will be rerated higher,” Humphrey said.

Overnight, Wall Street was hit by higher yields which hit fresh 16-year highs. The Dow Jones fell 0.5%, the S&P 500 lost 0.3% and the Nasdaq Composite added 0.1%. Financial shares underperformed, with the S&P 500 banks sliding 2.4%, after S&P joined Moody’s to downgrade multiple regional U.S. lenders. Elsewhere, Treasuries took a breather from the recent rout. Ten-year yields eased 2 basis points to 4.3082% in Asia, after touching a 16-year top of 4.3660% a session earlier. A jump in Treasury issuance, Fitch’s credit downgrade three weeks ago and concerns China will dump Treasuries to support the yuan have added to a sell-off as investors await the Fed’s annual summit in Jackson Hole, Wyoming, later this week for more rate clues.

Comments from Richmond Fed President Thomas Barkin raised expectations that Chair Jerome Powell would drive home a hawkish message, after strong U.S. economic data makes the “reacceleration scenario” possible. In the currency markets, the U.S. dollar was still standing strong near its two month top at 103.5 against a basket of major currencies. The yen gained 0.2% to 145.6 per dollar, pulling further away from a nine-month trough of 146.56, amid talks that Japan will only intervene in the market if the currency plunges past 150 to the dollar.

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Published by the Mercury Team on 23 August 2023

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