person counting money as U.S. Dollar

U.S. Dollar steady as traders consider Fed, global rates outlook. Photo by Igal Ness on Unsplash

U.S. Dollar steady as traders consider Fed, global rates outlook

The U.S. dollar steady but was on the back foot on Thursday, though it drew some support from higher U.S. Treasury yields as traders contemplated the possibility of another rate hike.

person counting money as U.S. Dollar

U.S. Dollar steady as traders consider Fed, global rates outlook. Photo by Igal Ness on Unsplash

Reuters: The U.S. dollar steady but was on the back foot on Thursday, though it drew some support from higher U.S. Treasury yields as traders contemplated the possibility of another rate hike by the U.S. Federal Reserve, even if it pauses next week.

U.S. Dollar steady

The increased expectations that U.S. and global interest rates may have further to rise has come on the back of surprise rate increases by the Bank of Canada and the Reserve Bank of Australia this week. The BoC on Wednesday hiked its overnight rate to a 22-year high of 4.75% after a four-month pause, while the RBA on Tuesday similarly raised interest rates by a quarter-point to an 11-year high and warned of more to come. The Canadian dollar was last steady at C$1.3365 to the greenback, after rising to a one-month top of C$1.3321 in the previous session. “Canada’s central bank is viewed as one of the leaders when it comes to being proactive with monetary policy,” said Edward Moya, senior market analyst at OANDA. “The BoC is signaling that more rate hikes could come and that has everyone rethinking that the Fed will be done after the July hike.”

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Elsewhere, the U.S. dollar edged broadly lower in early Asia trade, with sterling rising 0.08% to $1.2449, while the euro similarly gained 0.08% to $1.0707. European Central Bank policymakers had on Wednesday struck a hawkish tone and guided that more rate hikes are on the horizon, with interest rates likely to stay higher for longer. Against the yen, the greenback slipped 0.21% to 139.85, with the Japanese currency buoyed by Thursday’s data showing Japan’s economy grew an annualised 2.7% in the first quarter, much higher than the initial estimate for a 1.6% expansion. The U.S. dollar index dipped slightly to 104.02, though strayed not too far from an over two-month high hit last week, on the back of higher Treasury yields.

The two-year Treasury yield, which typically moves in step with interest rate expectations, last stood at 4.5479%, after touching an over one-week high of 4.604% in the previous session. The benchmark 10-year yield was last at 3.7914%, having risen roughly 10 basis points to peak at 3.801% on Wednesday. Money markets are pricing in a 29% chance that the Fed raises rates by 25bps at its policy meeting next week. “Markets have raised their FOMC rate hike expectations following a surprise Bank of Canada rate hike,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “The Funds futures market is pricing an 81% chance of a 25bp FOMC hike by July.” In Asia, the Chinese offshore yuan was pinned near a more than six-month low at 7.1469 per dollar, after having slid to 7.1527 in the previous session, its lowest since late November.

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Data released on Wednesday showed China’s exports shrank much faster than expected in May while imports extended declines, raising doubts about the country’s fragile economic recovery. “To some extent, it’s a view that the trade data’s another symptom of a faltering recovery,” said Ray Attrill, head of FX strategy at National Australia Bank. The Aussie was last 0.18% higher at $0.6665, having slipped nearly 0.3% in the previous session, while the kiwi rose 0.22% to $0.6050, reversing some of Wednesday’s 0.7% fall. Both antipodean currencies are often used as liquid proxies for the Chinese yuan. In other currencies, the Turkish lira slumped to a record low of 23.39 per dollar.

British Pound

Reuters: Sterling held steady on Wednesday after data showed the first annual drop in UK house prices in more than a decade, and traders focused on sticky inflation and the outlook for Bank of England monetary policy. At 0821 GMT, the pound was flat against the dollar at $1.242, having earlier dropped by as much as 0.2% after the house price data. It was also flat against the euro at 86.07 pence. The pound has slipped from an 11-month high of $1.26790 touched on May 10. British houses prices fell on an annual basis in May for the first time in 11 years, mortgage lender Halifax said on Wednesday, as an increase in mortgage rates from the country’s largest provider comes into effect. “The bigger impact house prices have is in the equity markets, as they are important for housebuilders, and it is no surprise that we are seeing the likes of Persimmon and Redrow all trading lower this morning,” Stuart Cole, chief macro economist at Equiti Capital, said. He added inflation and the rate outlook is a more important driver for now.

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On May 26, data showed British inflation fell in April, but by less than expected. It remains above the rate of price growth in the United States and most of Europe. The data raised bets that the BoE will have to keep hiking interest rates. The UK central bank will next convene on June 22, with traders betting on an 88% chance of a 25-basis-point rate rise. . The BoE has raised rates 12 times since late 2021 to 4.5% from just 0.1% in to try to calm inflation. Britain’s next consumer price index print is due on June 21, while labour market data is due on June 13, with both keenly anticipated for a steer on the BoE’s next likely move. Another point of focus for Cole is whether the BoE will end up hiking to the extent that it drives the economy into recession. “That risk appears to have diminished of late, but if core CPI continues to perform strongly then I think they will start to resurface,” he said.

South African Rand

Reuters: The South African rand weakened in early trade on Wednesday after investors warned that the outlook for Africa’s most industrialised economy remained bleak despite marginal economic growth in the first quarter. At 0606 GMT, the rand traded at 19.2700 against the dollar, around 0.42% weaker from its previous close. The dollar was last trading at 104.150, around 0.067% stronger, against a basket of global currencies. The rand strengthened slightly on Monday after facing some headwinds and tepid investor sentiment, which pushed the unit as low as 19.9075 against the greenback last week. “There are some notable South Africa positives to reference, but rand gains are nevertheless running out of steam,” said Rand Merchant Bank analysts in a research note.

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The country managed a 0.4% growth in gross domestic product for the first quarter and dodged a recession. Nonetheless, investor outlook remains bleak as the country’s worst rolling blackouts on record show no signs of abating. Investors will on Thursday turn their attention to the South African Reserve Bank when it releases the country’s first-quarter current account figures, which could give an indication on the health of Africa’s most industrialised economy. South Africa’s benchmark 2030 government bond was weaker in early deals, with the yield up 1.5 basis points at 10.980%.

Global Markets

Reuters: Asian shares slid on Thursday after a surprise interest rate hike by Bank of Canada brought back fears that U.S. rates could stay higher for longer and the Federal Reserve could remain hawkish when it meets next week. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.48%, while Japan’s Nikkei fell 1%. Australia’s S&P/ASX 200 index eased 0.29%. The downbeat mood looked set to continue in Europe, with the Eurostoxx 50 futures off 0.30%, German DAX futures losing 0.31% and FTSE futures 0.06% lower. Canada surprised markets on Wednesday by hiking its overnight rate to a 22-year high of 4.75%, with traders expecting another increase next month to cool an overheating economy and stubbornly high inflation. The Bank of Canada had been on hold since January to assess the impact of previous hikes.

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The move from the BoC comes after Australia also stunned markets by hiking interest rates earlier this week. The Reserve Bank of Australia later warned of more rate hikes to temper rising pricing pressures. Tapas Strickland, head of market economics at NAB, said the steps from BoC and RBA highlight that central banks aren’t done with the hiking cycle. “Next week’s U.S. CPI will be pivotal for whether the Fed goes in June, or skips as widely telegraphed.” Consumer inflation data on Tuesday is expected to show prices rose by 0.30% in May. Markets are now pricing in a 64% chance of the Fed standing pat next week, compared with 78% just a day earlier, the CME FedWatch tool showed. Traders are pricing in a 25 basis point hike in July.

Economists polled by Reuters expect the Fed to not raise rates at its June 13-14 meeting, but a significant minority expects at least one more hike this year. More than 90% of economists, 78 of 86, polled during June 2-7 said the Federal Open Market Committee would hold its federal funds rate at 5.00%-5.25%. China shares eased 0.12%, while Hong Kong’s Hang Seng Index fell 0.57%. Data on Wednesday showed May exports in China slumped 7.5% year-on-year, the biggest decline since January and far below the 0.4% decline analysts expected. “The weak export numbers will have observers looking for a new round of policy stimulus,” Saxo Markets strategists said.

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Treasury yields were stable in early Asian hours after surging overnight after the move from Canada’s central bank. The yield on 10-year Treasury notes was up 1.1 basis points to 3.795%, while the yield on the 30-year Treasury bond was up 0.5 basis points to 3.947%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 1.7 basis points at 4.567%. In the currency market, the dollar index , which measures the U.S. currency against six major peers, eased 0.038%, with the euro up 0.09% to $1.0707. The yen strengthened 0.22% to 139.80 per dollar after revised data showed Japan’s economy grew more than initially thought in January-March.

The Canadian dollar rose 0.08% to 1.34 per dollar, while Turkey’s lira , hit a record low against the dollar as the newly re-elected government appeared to loosen stabilising measures after signalling a pivot to more orthodox policies. U.S. crude futures fell 0.22% to $72.37 per barrel and Brent was at $76.76, down 0.25% on the day. Gold prices steadied on Thursday following a 1% drop in the previous session, with spot gold up 0.3% at $1,945.89 an ounce.

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Published by the Mercury Team on 8 June 2023

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