US Dollar paused - mountain bike breaks

US Dollar paused for breath as China GDP beats estimates. Photo by Clark Young on Unsplash

US Dollar paused for breath as China GDP beats estimates

The US Dollar paused on Monday after a sharp rise overnight as strong U.S. economic data reinforced FED interest rate hike expectations.

US Dollar paused - mountain bike breaks

US Dollar paused for breath as China GDP beats estimates. Photo by Clark Young on Unsplash

Reuters: The US Dollar paused on Monday after a sharp rise overnight as strong U.S. economic data reinforced expectations that the Federal Reserve will hike interest rates in May, while China’s economic recovery gathered pace in the first quarter.

US Dollar paused on Monday

The dollar index , which measures the currency against six major rivals, eased 0.078% to 102.01, after rising 0.5% overnight. China’s gross domestic product (GDP) grew 4.5% year-on-year in the first three months of the year, data showed on Tuesday, beating analyst forecasts for a 4% expansion as the end of COVID-19 curbs lifted the world’s second-largest economy out of a slump. Separate data on March activity also released on Tuesday showed retail sales growth quickened to 10.6%, beating expectations and hitting a near two-year high, while factory output growth also sped up but was just below expectations.

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OCBC currency strategist Christopher Wong said it was quite an encouraging report, with retail sales, GDP and property sales all higher than expected, reinforcing that post-pandemic recovery momentum remained intact. The offshore Chinese yuan fell 0.02% to $6.8795 per dollar. In the U.S., data released on Monday showed confidence among single-family homebuilders improved for a fourth consecutive month in April, while manufacturing activity in New York state increased for the first time in five months. Markets are pricing in a 91% chance of the Fed raising interest rates by 25 basis points at its next meeting in May, CME FedWatch tool showed, with traders expecting rate cuts towards the end of the year. “The dollar can remain sensitive to the strength, or not, of the economic data as the Fed likely nears the end of their tightening cycle,” said Kristina Clifton, an economist at Commonwealth Bank of Australia (CBA). Meanwhile, the euro was up 0.07% to $1.0934, but was below the one-year high of $1.10755 it touched last week, with traders expecting the region’s central back to stick to its monetary tightening path.

The Japanese yen was flat at 134.48 per dollar, while sterling was last trading at $1.2381, up 0.06% on the day. Investors will focus on UK employment data due later in the day that could potentially cause some volatility in the pound if the report shows that the labour market is not cooling. CBA’s Clifton said Britain’s policy makers will be watching the wages data closely for further confirmation that private sector income growth is slowing. The kiwi rose 0.10% to $0.619, while the Australian dollar gained 0.22% to $0.672. Minutes of the last Reserve Bank of Australia meeting showed that the central bank considered an 11th-consecutive rate hike in April before deciding to pause. The central bank, however, said it was ready to tighten further if inflation and demand failed to cool.

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British Pound

Reuters: Sterling inched down on Monday, ahead of a busy week of economic data that will set the tone for the Bank of England’s next meeting and the near-term fortunes for the British currency. The pound was last down 0.1% against the dollar at $1.24005. It reached a 10-month high of $1.2545 last Thursday, having been a major beneficiary of the dollar’s recent weakness due to market expectations that a peak in U.S. rates is looming, before suffering on Friday as the greenback staged a small comeback. The British currency also softened a touch against the euro on Monday as the European common currency, briefly touched a three-week top of 86.63 pence, before trading steady on the day at 88.51 pence.

“It is a big week for UK data and what it means for the Bank of England’s policy decision on 11 May,” said Chris Turner, ING’s head of markets. UK February jobs figures are due on Tuesday, which will include wage growth figures, and March inflation numbers are out on Wednesday. Market pricing currently indicates around a 75% chance of a further Bank of England rate hike at its next meeting in May, but signs of slowing inflation or a struggling economy could cause those expectations to change and cause the pound to weaken. “We suspect EUR/GBP could trade 0.89+ were the market this week to price out the chances of that May hike,” said Turner.

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British economic data this year so far has been largely coming in better than the albeit low expectations. Analysts at Rabobank said this improvement in sentiment lay behind speculators’ net short GBP positioning dropping to its lowest level since March 2022, according to CFTC data.

South African Rand

Reuters: The South African rand fell on Monday as the dollar gained on global markets, while stocks were down at the day’s close. At 16:20 GMT, the rand traded at 18.3100 against the dollar, 1.33% weaker than its closing level on Friday. The dollar index, which measures the currency against six rivals, was last up 0.541% at 102.210. Greg Davies, head of wealth at Cratos Capital, told Reuters that the rand remained weaker due to investors’ concerns over long power cuts during the South African winter. The struggling state utility said on Monday it will continue to implement Stage 5 and Stage 6 power cuts due to breakdowns at some of its plants.

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On Wednesday, investors will be looking closely at the March consumer price index (CPI) to gauge the success of the South African Reserve Bank’s interest rate hikes in taming price pressures. The worst power cuts on record mean the prospects for growth in Africa’s most industrialised economy this year are bleak. But in an interview with Reuters on Friday, Finance Minister Enoch Godongwana ruled out the chances of a recession this year.

On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed down 0.13%, while the broader all-share index ended the day 0.19% lower. The government’s benchmark 2030 bond was weaker, with the yield up 10.5 basis points at 10.050%.

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Global Markets

Reuters: Asian stocks weakened on Tuesday, brushing off an initial lift from better-than-expected Chinese economic data as signs of patchiness in the country’s recovery weighed on investor sentiment. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5%, a deeper loss than earlier in the day when it was off 0.27%. China’s economy grew 4.5% year-on-year for the first quarter, eclipsing the expectations of most economists. The currencies of Australia and New Zealand , whose exports are reliant on Chinese demand, both popped higher after the GDP data. Despite some initial momentum in wider markets, the better-than-expected data failed to fire up a sustained rally in regional equities. Hong Kong’s Hang Seng Index fell 0.85% on Tuesday, dragged lower by consumer and technology stocks. China’s bluechip CSI300 Index was barely higher as it gained 0.08%. Australian shares were off by 0.45%. Japan’s Nikkei stock index was the standout performer in the region as it rose 0.55%.

Analysts said The mixed market performance was the result of some underlying Chinese data falling below expectations, despite the strong headline results. Separate data on Chinese activity also released on Tuesday showed factory output speeding up but missing expectations while fixed asset investment growth unexpectedly slowed. “The headline number is a positive surprise and overall it’s a good set of numbers albeit uneven, that is reflected in the markets response,” said David Chao, global market strategist for Asia Pacific at Invesco. “The thesis the market has that China is exiting the pandemic and growth will be driven by consumption is still in tact. While the recovery is on track, I don’t think economic growth from what we have seen so far is exceeding expectations too much.” Chao said weaker property investment during the quarter showed the trouble-proned sector had not recovered and could again hold back China’s economic growth this year.

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“I think the numbers show today that the 5% growth target will be met but how much growth exceeds that will be contingent on the property market,” he said. For 2023, GDP growth was expected to pick up to 5.4%, a Reuters poll last week showed, from 3.0% last year, which was one of its worst performances in nearly half a century due to the pandemic. China’s government has set a 5% target for economic growth for this year after missing the 2022 goal. In Asian trade, the yield on the benchmark 10-year Treasury notes rose to 3.5889% compared with its U.S. close of 3.591% on Monday. The two-year yield , which rises with traders’ expectations of higher Fed fund rates, touched 4.1773% compared with a U.S. close of 4.188%. Elsewhere, Australia’s central bank considered hiking rates for an 11th time in April before deciding to pause, but was ready to tighten further if inflation and demand failed to cool, minutes of the Reserve Bank of Australia’s April meeting showed.

In early European trades, the pan-region Euro Stoxx 50 futures were up 0.16% at 4,322, German DAX futures were up 0.13% at 15,951, FTSE futures were up 0.16% at 7,893. U.S. stock futures, the S&P 500 e-minis , were down 0.08% at 4,173.3. The dollar rose 0.02% against the yen at 134.49 , still some distance from its high this year of 137.91 hit in March. The European single currency was up 0.1% to $1.0929, having gained 0.89% in a month, while the dollar index , which tracks the greenback against a basket of currencies of other major trading partners, was down at 102.03. U.S. crude ticked up 0.27% to $81.05 a barrel. Brent crude rose to $85per barrel. Gold was slightly high with the spot price at $1999.45 per ounce.

Published by the Mercury Team on 18 April 2023

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