US dollar retreated on fresh signs of slowdown and Euro rebounds

Reuters: The US Dollar retreated on Wednesday on fresh signs of a U.S. slowdown after orders for core capital goods fell more than expected in March, while the economic outlook for Europe could surprise to the upside and strengthen the euro.

US dollar retreated: Euro rebounds

The Swedish crown weakened sharply after the country’s central bank was less hawkish than expected, while the euro rebounded 0.6% from losses on Tuesday when jitters over U.S. banks buoyed the safe-haven dollar.

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The dollar index , which measures the currency against six major rivals, fell 0.354% as new orders for key U.S.-manufactured capital goods fell more than expected last month, the Commerce Department said. Unfilled orders continued a steady decline, indicating there was less in the pipeline to drive activity and that business spending on equipment was likely a drag on first-quarter growth. Meanwhile, Germany raised its economic forecast for growth this year to 0.4% from a previously predicted 0.2%, according to government spring economic projections published on Wednesday. “Europe is taking a lot of people by surprise,” said Ed Moya, senior market analyst at OANDA in New York. “There’s still a lot of risks for their economy, their outlook. But this is still a market that is rather stunned by what we’re getting out of Europe.”

Driving the dollar versus major currencies are early signs of a U.S. slowdown and decelerating inflation that will be greater than other economies, said Thierry Wizman, global FX & interest rates strategist at Macquarie in New York. “Whatever slowdown we’re going to see in the U.S. is going to come earlier and it’s going to be more intense, at least in its early stages, than whatever we’re going to see coming out of the rest of the world,” Wizman said. “The disinflation that we’re seeing or going to see in the U.S. in final goods and services prices, is going to be more intense, more significant, than whatever disinflation that we get in the rest of the world,” he said.

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Manufacturing, which accounts for 11.3% of the U.S. economy, is reeling from the Federal Reserve’s fastest interest rate hiking campaign in four decades. The Fed is expected to hike rates by 25 basis points when policymakers conclude a two-day meeting on May 3, and then will likely pause its rate hike campaign. But the market expects further rate hikes from the European Central Bank, a difference with the U.S. central bank that is driving currency moves. Sweden’s central bank raised its policy rate by half a percentage point to 3.50% in line with market forecasts, and said it expected a further hike at its meeting in June or in September, but two deputy governors voted for a smaller hike.

The euro rose 1.05% against the crown to a high of 11.426, set for its biggest one-day gain since early March. The dollar , which traded down 0.7% against the crown before the Riksbank’s decision, rose 0.90% to 10.337. Sterling was last trading at $1.2457, up 0.39% on the day, while the yen strengthened 0.13% at 133.52 per dollar. Investor attention will firmly be on the slate of central bank meetings in the next few weeks with the Bank of Japan, under the new Governor Kazuo Ueda, holding its policy meeting later this week.

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British Pound

Reuters: Sterling rose against the dollar on Wednesday, as traders pared back their holdings of safe-haven assets after U.S. banking jitters sparked a rush for safety the day before. At 1015 GMT, the pound was 0.49% higher against the dollar at $1.2471. “Despite expectations of the Bank’s terminal rate falling as financial stability concerns cross the Atlantic, the pound has almost retraced all of yesterday’s losses as FX traders look to divest out of the dollar today,” said Simon Harvey, head of FX analysis at Monex Europe.

The U.S. dollar had moved higher overnight on concerns over the U.S. banking sector and the economy, along with the safe-haven yen, but this reversed on Wednesday morning. “I think what we are seeing is just a market flowing out of the dollar and trimming long positioning that was built yesterday,” said Monex’s Harvey. According to Stuart Cole, chief macro economist at Equiti Capital, the market has taken comfort that the banking crisis will not spread, while positive earnings from some major U.S. tech companies have helped allay concerns that the US economy is in trouble. “The culmination of all this has been some easing in demand for safe haven assets such as the dollar, allowing the likes of sterling to benefit,” said Cole. “But I think it is a misleading picture and the market is choosing to look at the current earnings numbers while choosing to ignore the increasing signs that U.S. economic activity does appear to be slowing,” said Cole.

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The pound is not far off 10-month highs at $1.2540 that it touched on April 14. Meanwhile, against the euro the pound was 0.15% lower at 88.56 pence on Wednesday. “The euro and the pound have continued to move in tandem with no clear drivers justifying a divergence between these two currencies at the moment since most of the news are coming from the US and the dollar side,” said ING FX strategist Francesco Pesole. Traders are predicting a 92% chance of a 25 bps hike from the Bank of England (BoE) at its next meeting set for May 11th. The BoE has hiked rates eleven times since the beginning of this rate hiking cycle in December 2021, as it battles to bring down double-digit inflation.

South African Rand

Reuters: The South African rand was steady against the dollar on Wednesday following data showing a dip in local producer inflation. At 1556 GMT, the rand traded at 18.3700 to the dollar, near its previous close of 18.2675. The dollar was down about 0.44% against a basket of currencies. Shedding further light on inflationary pressures in Africa’s most industrialised economy, statistics agency data showed on Wednesday that South Africa’s producer inflation, slowed to 10.6% year-on-year in March from 12.2% in February.

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On a month-on-month basis, it was at 1.0% in March from 0.6% the previous month. Analysts polled by Reuters expected March producer inflation to fall to 10.95% in annual terms and rising to 1.4% from February. South Africa’s central bank said on Tuesday in a biannual monetary policy document that elevated core inflation was expected to slow the pace of disinflation in the near term. South Africa marks Freedom Day on Thursday – which commemorates the first post-apartheid elections held on April 27, 1994 – and with the following Monday another public holiday, many local traders will be away from their desks from Wednesday’s market close until next Tuesday.

Shares on the Johannesburg Stock Exchange rose slightly, with both the broader all-share index and blue-chip Top-40 index ending about 0.3% higher. South Africa’s benchmark 2030 government bond edged higher, with the yield down 2 basis points at 10.205%.

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Global Markets

Reuters: Asian shares extended losses on Thursday as troubles at U.S. lender First Republic Bank continued to unnerve investors amid concerns that growth in the world’s biggest economy could very well surprise to the downside. MSCI’s broadest index of Asia-Pacific shares outside Japan were 0.3% lower on Thursday, while Japan’s Nikkei lost 0.4%. China’s blue chips were flat, but Hong Kong’s Hang Seng Index slid 0.3%. Geopolitics also cast a pall over markets.

U.S. Commerce Secretary Gina Raimondo said on Wednesday that Chinese cloud computing companies like Huawei Cloud and Alibaba division Alibaba Cloud could pose a threat to U.S. security and vowed to review a request to add them to an export control list. But tech giants bucked the gloom, with Nasdaq futures up 0.4% in early Asian hours as Facebook owner Meta soared 12% after the bell with its earnings beat. Intel and Amazon will report their results later today. Nomura shares fell more than 7% early on Thursday after Japan’s biggest brokerage posted a sharp fall in quarterly net profit after worries about a global banking crisis roiled markets and hit its investment banking business.

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Overnight, in a brutal sell-off, First Republic Bank’s market value briefly sank as much as 41% to about $888 million, under $1 billion for the first time, a far cry from its peak of more than $40 billion in November 2021. Investors are waiting to see whether it can find buyers for assets and engineer a turnaround after CNBC reported that U.S. government officials are currently unwilling to intervene. “First Republic is a bank it would seem to soon be no more. As the bank attempts all manner of rescue strategies it continues to slide relentlessly,” said Clifford Bennett, chief economist at ACY Securities. “It is a case of the incredible shrinking bank. Until, in the end, it likely just simply ceases to exist.”

Overnight, Nasdaq notched a 0.5% gain on tech, while the S&P 500 and the Dow were pulled lower by weakness in economically sensitive sectors, hinting at mounting recession jitters. Data showed that new orders for key U.S.-manufactured capital goods fell more than expected in March, suggesting that business spending on equipment was likely a drag on economic growth in the first quarter. The Atlanta Federal Reserve’s GDPNow, which tracks how incoming data influences estimated gross domestic product (GDP) for the current quarter, showed that the estimate for growth is now at an annualised 1.1%, sharply down from 2.5% just a week ago. That suggests there may be a downside risk to U.S. first-quarter GDP data, due later on Thursday, with analysts polled by Reuters tipping an expansion of 2%. Wells Fargo lowered its forecast for U.S. GDP growth by 100 basis points to a 0.8% rise.

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Fed funds futures are pricing in a chance of about 80% that the Federal Reserve will hike interest rates by 25 basis points (bps) at its May meeting next week, while factoring in expected rate cuts of 45 bps by the end of the year. In the currency markets, moves were largely muted. The euro was hovering close to its highest level in over a year at $1.104, benefiting from bets that the economic outlook for Europe could be on the upside after Germany raised its economic forecast for growth this year.

The dollar index, which measures the currency against six major rivals, dropped to 101.4 on fresh concerns over a U.S. slowdown. U.S. Treasuries were steady, with the two-year yields holding at 3.9345%, and ten-years at 3.4391%. One-month Treasury yields tumbled ahead of a possible Washington vote on the U.S. debt ceiling. Oil recovered some ground on Thursday after tumbling almost 4% on recession fears. U.S. crude futures edged up 0.3% to $74.5 per barrel, while Brent crude futures rose 0.5% to $78.09 per barrel. Gold was flat at $1,990.04 per ounce.

Published by the Mercury Team on 27 April 2023

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