Sterling slipped after survey data shows house building slump

Reuters: The Pound Sterling slipped on Tuesday as data showed that British house building wilted in May and the dollar found a footing.

British Pound Sterling slipped

Sterling was last down 0.18% at $1.241. The euro was flat against the pound at 86.18 pence. The survey data showed house building in Britain fell at its fastest pace since May 2020 last month as construction companies struggled with rising interest rates. The headline purchasing managers’ index survey score for the construction sector came in at 51.6 in May, above the 50 mark which signals growth and up from 51.1 in April. Yet the headline concealed divergence within the construction sector, with commercial and civil engineering activity rising but house building suffering.

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Chris Turner, head of markets at ING, said in a research note that Britain faced a “mortgage time bomb”, with more than 600,000 mortgage holders due to refinance at higher rates in the next six months. Turner said this could lead to the Bank of England raising interest rates by less than markets expect. Traders currently envisage rates rising to around 5.4% later this year, from 4.5% currently. The pound rose to a one-year high of $1.268 in mid-May as inflationary pressures remained strong – making more BoE rate hikes likely – and the outlook for the British economy has brightened somewhat. It has since slipped as the dollar has found favour among investors due in part to fears about the now-resolved U.S. debt ceiling standoff and in part because of strong U.S. labour market data. The dollar index – which measures the greenback against six peers – was up 0.15% at 104.15.

US Dollar

Reuters: The dollar wobbled on Wednesday as expectations of a rate hike by the Federal Reserve next week receded, though currency moves were subdued as traders contemplated whether an end to the global monetary policy tightening cycle was near. The Aussie scaled a fresh three-week high in the wake of a rate increase and a decidedly hawkish stance by its central bank, peaking at $0.6690 in early Asia trade. The antipodean currency was last 0.12% higher at $0.6680, holding on to most of the previous session’s 0.8% gain, after the Reserve Bank of Australia raised interest rates by a quarter-point to an 11-year high on Tuesday. In a speech on Wednesday, RBA Governor Philip Lowe stepped up a warning of more rate hikes ahead to temper rising price pressures, even as risk of a steep economic downturn heightens with data showing GDP expanded at its weakest pace in 1-1/2 years last quarter. “The cash rate is now 4.1%, which we think is in a deeply restrictive territory, so that obviously means that the risk of a hard landing in the Australian economy has increased,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

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Similarly, rising expectations that the Bank of Canada could resume its tightening campaign at an interest rate decision later on Wednesday sent the Canadian dollar to a near one-month high of C$1.3388 to the greenback. The BoC was the first major global central bank to pause its rate-hike campaign in January. “There’s a bit of a mixed picture right now and some of the central banks that have earlier gone into a pause looks like it’s not really a pause, but more of a skip, and this may be what we’re getting with the Fed as well,” said Moh Siong Sim, a currency strategist at Bank of Singapore. “There is the idea that perhaps the developed markets’ central banks may have to do a bit more in raising rates.” Money markets are widely expecting the U.S. central bank to keep rates on hold at its policy meeting next week, though there are some expectations for the Fed to deliver another rate hike later this year. Against the dollar, sterling rose 0.05% to $1.2429, while the Japanese yen edged roughly 0.2% higher to 139.32.

The euro slipped 0.08% to $1.0685, while the U.S. dollar index gained 0.08% to 104.16. Euro zone consumers lowered their inflation expectations, a European Central Bank survey showed, a relief for policymakers after an unexpected surge a month earlier. In Asia, data out on Wednesday showed that China’s exports shrank much faster than expected in May and imports fell, albeit at a slower pace, as manufacturers struggled to find demand abroad and domestic consumption remained sluggish. The Chinese yuan barely reacted to the release, with the offshore yuan last 0.02% higher at 7.1278 per dollar. “We are getting to a point where there is a need for more policy stimulus so perhaps something could be coming around the corner, and that’s probably keeping the market hopeful,” said Bank of Singapore’s Sim. Elsewhere, the Turkish lira slid nearly 3% to a fresh record low of 22.15 per U.S. dollar, while the kiwi edged 0.13% lower to $0.6071.

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In cryptocurrencies, bitcoin fell roughly 1% to $26,955, after jumping nearly 6% on Tuesday. The U.S. Securities and Exchange Commission on Tuesday sued Coinbase, accusing the largest U.S. cryptocurrency platform of operating illegally because it failed to register as an exchange, a move which came just a day after the regulators sued Binance, the world’s largest cryptocurrency exchange, and its CEO Changpeng Zhao. “Bitcoin is trading higher on a flight to the quality end of crypto,” said Tony Sycamore, a market analyst at IG Markets. Binance’s BNB token was up marginally to $282.27, having plunged 9.2% on Monday.

South African Rand

Reuters: The South African rand and stocks rose in afternoon trade on Tuesday after the country’s gross domestic product figures showed marginal growthin the first quarter. At 1605 GMT, the rand traded at 19.2300 against the dollar, around 0.17% stronger than its previous close. South Africa narrowly avoided a recession in the first quarter, data showed, with manufacturing and finance holding up relatively well despite crippling power cuts. Both the quarterly and annual growth rates were in line with economists’ forecast in a Reuters poll. Nedbank economists said in a note that the first-quarter modest rebound will likely be short-lived as rolling power cuts intensified in the second quarter, disrupting operations, increasing production costs and hurting profits. “These pressures, combined with the downturn in global growth and commodity prices, will hurt production and exports even further in the quarters ahead,” Nedbank added.

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The South African economy is being crippled by the worst rolling blackouts on record, leaving businesses and households in the dark for up to 10 hours daily. After the release of GDP figures, the International Monetary Fund said it supported the implementation of the government’s energy transition plan and emphasised the importance of fiscal support for affected communities and workers. “Resolving the ongoing energy crisis remains the top priority, providing an opportunity to accelerate the rollout of renewables,” the IMF said in a statement.

On the stock market, the Top-40 and the broader all-share indexes closed around 0.3% higher. South Africa’s benchmark 2030 government bond was stronger in afternoon deals, with the yield down 15.5 basis points to 10.965%.

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Global Markets

Reuters: Most Asia-Pacific stocks markets strengthened on Wednesday on rising expectations that China will step in to stimulate its economy and as overnight gains on Wall Street helped brighten the mood. European markets looked set to follow cautiously, with the pan-region Euro Stoxx 50 futures edging up by 0.23%. German DAX futures added 0.2%, while the FTSE futures were almost flat. U.S. stock futures, the S&P 500 e-minis , was up by 0.1%. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.6% by the late morning. China’s equity indexes gave up some gains after poor trade data in May. The benchmark equity index was almost flat, while Hong Kong’s Hang Seng added 0.9%.

Chinese manufacturers struggled to find demand abroad and domestic consumption remained sluggish, raising expectations of help for the economy. Exports shrank much faster than expected in May and imports fell, albeit at a slower pace. “Domestic demand is subdued, but external demand was even weaker so that supports the case for more resolute monetary policy stimulus measures by the PBOC to prop up domestic demand,” said Carlos Casanova, senior Asia economist at UBP. On Tuesday, China reportedly asked the biggest banks to cut deposit rates to boost the economy. Speculation of policy support for the troubled property sector has been lifting those shares over the past week.

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Japan was an outlier, as investors turned cautious about a rally, while there were sell-offs ahead of the fixing of special quotation prices at the end of the week. The Nikkei slid 1.1% after touching a 33-year high on Tuesday. “Overall, across the board, assets are doing pretty well,” said Yuting Shao, macro strategist at State Street Global Markets. “The U.S. debt ceiling uncertainty has been removed hope on China to introduce more help to the economy is also a good sign for the market.” The U.S. S&P 500 ended higher on Tuesday, gaining support from strengthening bets that the Federal Reserve will hold interest rates steady at its policy meeting next week.

The two-year Treasury yield , which typically moves in step with interest rate expectations, fell slightly to about 4.5% in Tokyo, from Tuesday’s close at 4.516%. The yield on 10-year notes slipped to around 3.67%. The U.S. dollar index was almost flat at 104.09. The Australian dollar reached its highest since mid-May at $0.6690, extending a rally following a central bank rate increase on Tuesday. Oil extended losses on Wednesday as concern over global economic headwinds deepened, erasing gains booked after top crude exporter Saudi Arabia’s surprise weekend pledge to deepen output cuts.

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Brent crude futures were down 40 cents, or 0.5%, at $75.89 a barrel at 0456 GMT. The U.S. West Texas Intermediate crude futures fell 35 cents, also 0.5%, to $71.39 a barrel. Gold was slightly higher, trading at $1,963.5 per ounce. Leading cryptocurrency bitcoin was trading at about $27,000, consolidating after a sharp overnight rebound from as low as $25,350. The token has been a paradoxical beneficiary of a U.S. Securities and Exchange Commission crackdown on cryptocurrency exchanges, and the classification of tokens including Solana, Cardano and Polygon as securities. “The SEC is making life nearly impossible for several altcoins,” said Oanda senior market analyst Ed Moya. “And that is actually driving some crypto traders back into Bitcoin.”

Published by the Mercury Team on 7 June 2023

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