US Dollar steadied - train

US Dollar steadied and stocks slip as focus falls back on Fed. Photo by taichi nakamura on Unsplash

US Dollar steadied and stocks slip as focus falls back on Fed

The US Dollar steadied on Wednesday after it seesawed with bond market volatility as investors scrutinised U.S. economic indicators.

US Dollar steadied - train

US Dollar steadied and stocks slip as focus falls back on Fed. Photo by taichi nakamura on Unsplash

Reuters: The US Dollar steadied on Wednesday after it seesawed with bond market volatility as investors scrutinised U.S. economic indicators, Federal Reserve commentary and corporate earnings for clues about the path for interest rates. 

US Dollar steadied

The dollar index – which gauges the greenback against six major peers – ticked up 0.11% to 101.83 in Asian trading, following a 0.36% slide on Tuesday that reversed the 0.54% rally of the session before. On Friday, the index had dipped to a one-year low at 100.78. U.S. two-year Treasury yields, which are extremely sensitive to Fed expectations, reached an almost one-month high of 4.231% overnight, and remained elevated in Tokyo trading on Wednesday. St. Louis Fed chief James Bullard told Reuters in an interview that he leans toward 75 bps of additional tightening, versus market consensus for one more 25 bp hike next month and then the potential for cuts later this year.

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By contrast, Atlanta Fed President Raphael Bostic said in an interview with CNBC that he expects just one more quarter point hike, followed by an extended pause. “The market is pretty much resigned to a 25 bps hike at the May meeting, so it’s more the ebb and flow of expectations about rate cuts this year that’s causing U.S. bond market volatility,” said Ray Attrill, head of foreign-exchange strategist at National Australia Bank. “It’s the volatility in the bond market that’s driving the dollar, not the other way round.” The dollar’s decline on Tuesday was also helped by reduced demand for its safety after what Attrill called “blockbuster” Chinese economic growth data that day, which buoyed the risk-sensitive Australian currency.

The Aussie eased 0.06% to $0.67245 on Wednesday, following a 0.41% rally in the prior session. The euro was steady at $1.09725 after Tuesday’s 0.42% rise. Sterling slipped 0.09% to $1.2413 following the previous day’s 0.38% advance. The dollar gained 0.17% to 134.31 yen, recovering from a 0.29% retreat on Tuesday. “A key driving force that used to support the broad USD -i.e. weakening global growth – has been fading, if not neutralised,” HSBC analysts wrote in a client note. “Its decline is likely to be larger than some may think.”

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British Pound

Reuters: Sterling rose on Tuesday after data showed pay growth was higher than forecast, supporting investors’ expectations that the Bank of England (BoE) will continue to hike rates in an effort to tame inflation. Britain’s unemployment rate rose unexpectedly 3.8% in the three months to February – rather than holding at 3.7%, as forecast by economists in a Reuters poll. But pay growth for the three months to January was revised up to 5.9% and held at that level for the three months to February – well above the forecast of 5.1% in the Reuters poll. Excluding bonuses, wage growth held at 6.6%. Sterling rose 0.5% against a weakening dollar to $1.2437. It edged up 0.05% against the euro to 88.25 pence, after touching on Monday its lowest level against the single currency since March 23.

“While the unemployment rate ticked up modestly to 3.8 wage gains remain incredibly strong,” said Dominic Bunning, Head of European FX Research at HSBC Bank. “All this may see the BoE take a less dovish approach than other central banks in the G10, whose economies appear to be facing a more acute softening of economic momentum. Any signs of continuing economic divergence in the UK’s favour should result in a stronger GBP,” he said.

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British consumer price inflation hit its highest in more than 40 years at 11.1% in October, and was still in double digits in February. The BoE expects inflation to fall below 4% by the end of the year as wholesale energy prices fall but markets are still pricing in more hikes from the central bank. Money markets see an 80% chance that the BoE will raise borrowing costs for a 12th meeting in a row next month to 4.5% from 4.25%, according to Refinitiv. They also expect another 25 basis point hike by September while, by comparison, money markets see the U.S. Federal Reserve cutting rates later this year.

South African Rand

Reuters: The South African rand strengthened early on Tuesday, reflecting a weaker dollar on global markets, before the release of a local business confidence index. At 06:00 GMT, the rand traded at 18.2775 against the U.S. currency, 0.2% firmer than its previous close. On Monday the rand also took its cue from the dollar, falling more than 1.3% as U.S. economic indicators bolstered expectations that the Federal Reserve would raise interest rates in May.

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The South African Chamber of Commerce and Industry will release March and February business confidence figures at 09:30 GMT, giving more insight into private sector sentiment in Africa’s most industrialised economy. Crippling power cuts by struggling state power utility Eskom were a major factor behind a drop in business confidence in January.

On Wednesday the focus turns to the March consumer price index, which could affect whether the South African Reserve Bank hikes interest rates again in May.

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Global Markets

Reuters: Stocks eased on Wednesday, while the dollar was under a little pressure, as traders shifted focus from U.S. banking stress to expectations for an imminent peak in the Federal Reserve’s interest rate cycle. MSCI’s index of Asia shares outside Japan dropped 0.5% to retreat further from Monday’s two-month high, and in morning trade Japan’s Nikkei looked set to snap an eight-day winning streak with a modest 0.4% loss. Overnight, the S&P 500 scraped a 0.1% gain. Bank of America’s first-quarter profit beat forecasts, and shares rose, following strong results at rivals that seem to have soothed market concerns about the sector’s stability. “So far the major banks that have reported have largely helped to settle market nerves,” said Khoon Goh, head of Asia research at ANZ in Singapore. “With those stresses easing away, markets are now back to focusing on the Fed.”

To that end a slew of Federal Reserve speakers are in the frame this week ahead of the pre-meeting blackout period preceding May’s policy announcement that begins on the weekend. The Fed’s “beige book” of economic conditions is published later on Wednesday and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.

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Markets are pricing an 86% chance the Fed raises rates by 25 basis points at the May meeting, and that wasn’t swayed terribly much by conflicting outlooks from two non-voting Fed officials on Tuesday. St Louis Fed President James Bullard told Reuters the Fed ought to keep raising rates to subdue persistent inflation. Atlanta Fed President Raphael Bostic told CNBC he thinks the Fed should hike one more time then pause to consider the next move. Traders have been tiptoeing out of bets that rate cuts will fairly swiftly follow a final hike, though remain positioned for a peak. The inversion between three-month Treasury yields and 10-year yields, at more than 160 bps, is the deepest since 1981 when the Fed funds rate was climbing down from a mid-year peak of 19%. Ten-year yields were last at 3.5851%. The prospect of peak rates has been applying downward pressure on the U.S. dollar. Better-than-expected growth data in China and hot British wages added to that earlier in the week.

British and European inflation figures due later on Wednesday could add more if they make a case for hikes on the Atlantic’s eastern shores to go on beyond those in the U.S. Sterling hit a 10-month high of $1.2545 last week and bounced with Tuesday’s wages data. It was last at $1.2410. The euro hit a one-year high above $1.10 last week and lurked at $1.0966 in Asia trade on Wednesday. Elsewhere, Brent crude futures were steady at $84.79 a barrel, roughly where they have traded for a few weeks since OPEC+ announced surprise production cuts.

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Gold held above $2,000 an ounce and bitcoin above $30,000. S&P 500 futures slipped 0.2% in the Asia session while European futures were flat. Citi strategist Matt King warned that markets’ calm may be shortlived as central banks’ cash injections made to ward off worries about systemic bank risks start to wear off. “This held down real yields, propped up equity multiples, and tightened credit spreads in the face of falling earnings expectations,” he said. “High-frequency liquidity indicators suggest this is already stalling, and coming weeks seem increasingly likely to bring a sharp reversal.”

Published by the Mercury Team on 19 April 2023

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