Reuters: The dollar inched broadly higher in cautious trade on Monday and held near 150 yen as traders looked to a policy decision by the Bank of Japan later in the week, alongside other major central bank meetings and a slew of economic data releases globally.
U.S. Dollar inched broadly higher
The BOJ kicks off its two-day monetary policy meeting on Monday, leading a week which will also see interest rate decisions from the U.S. Federal Reserve and the Bank of England. A PMI data deluge, inflation figures in the euro zone and U.S. nonfarm payrolls also add to the mix of the event-packed week. “It’s definitely a busy week,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “I think for the FOMC and the Bank of England, they will be pretty low key with them leaving interest rates on hold. The BOJ meeting will be the most interesting one given heightened speculation over a policy tweak at this meeting.”
The yen was last 0.1% lower at 149.75 per dollar, getting a slight reprieve after having struck a one-year trough of 150.78 per dollar last week. A recent surge in global interest rates has heightened pressure on the BOJ to change its bond yield control, as speculation mounts that the dovish central bank could hike its existing yield cap at this week’s meeting. “Our base case remains that the BOJ will leave its monetary policy settings unchanged, although we acknowledge that there is a risk that they will announce tweaks to its yield curve control programme,” said Kong.
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In the broader market, currency moves were largely subdued as traders stayed on guard and risk sentiment remained fragile. The Australian and New Zealand dollars nudged higher after having slid to fresh 2023 lows last week, with the Aussie last 0.19% up at $0.6346. The kiwi gained 0.22% to $0.58215. Over the weekend, Israel signalled intent to encircle Gaza’s main city, publishing pictures of battle tanks on the Palestinian enclave’s western coast as conflict in the Middle East raged. “The geopolitical backdrop in the Middle East remains a dominant market consideration,” said Chris Weston, head of research at Pepperstone.
Against the dollar, sterling fell 0.12% to $1.2108, while the euro slipped 0.02% to $1.0563. The dollar index edged 0.03% higher to 106.63, as investors assessed what the recent run of resilient U.S. economic data would mean for the Fed’s rate outlook. Data on Friday showed U.S. consumer spending surged in September as households boosted purchases of motor vehicles and travelled, keeping spending on a higher growth path heading into the fourth quarter. While expectations are for the Fed to leave interest rates on hold when it announces its policy decision later in the week, markets are pricing in a roughly 19% chance of a hike in December, according to the CME FedWatch tool.
“While the Fed will certainly not provide forward guidance in the classical sense at the upcoming meeting, it has already provided some helpful information on its interpretation of recent developments: a more balanced view of risks,” said Christian Scherrmann, U.S. economist at DWS. “The question is how the decision to hold rates will be communicated this time, especially as the Fed is not yet in a position to declare victory on inflation.”
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British Pound
Reuters: Sterling was headed for weekly declines against the dollar and the euro on Friday after struggling amid a nervous tone in markets that has boosted the dollar, as eyes start to turn to the Bank of England’s meeting next week. The pound was last down a whisker on the day against the dollar at $1.2120, but set for a weekly fall of 0.37%, and heading for a monthly drop of around 0.7% due to earlier declines. It is close to a six-month low of 1.2039 hit earlier in October. There has been few specific British factors to have moved sterling this week since Tuesday’s jobs data that showed the labour market has lost some of its inflationary heat. That sent the pound lower as it underscored market expectations that the BoE will keep rates on hold at its meeting next week.
That absence of domestic news left the British currency at the mercy of global flows, notably the broadly stronger dollar, whose gains in recent months have been underpinned by the sell-off in the U.S. Treasury market that sent benchmark yields past 5% at one point this week. Jitters in the stock market, and the war in the Middle East, have also not helped sterling, which is among the more vulnerable major global currencies to declines in market sentiment. Domestic factors will be more important for the pound this week, with BoE rate setters meeting on Thursday, where their updated macro economic projections will also be released.
Markets have revised their expectations that sticky inflation would mean the BoE would have to keep raising rates longer than other major peers. Market pricing now reflects expectations that the central bank will leave rates where they are and not hike further this cycle. That means, barring surprises, next Thursday’s focus will be on the economic outlook. “A lot has changed since the Monetary Policy Committee last updated its forecasts. A materially lower benchmark bank rate path has coincided with a weaker sterling. And commodity prices from oil and gas have picked up, with geopolitical risks coming to the fore,” said analysts at Deutsche Bank in a note.
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“All up, the bank’s updated conditioning market assumptions will likely spell some bad news for the MPC’s medium-term inflation forecasts.” The European Central Bank kept rates on hold at its meeting this week, helping send the euro down 0.17% against the pound. The common currency rebounded a fraction on Friday, up 0.07% at 87.15 pence, set for a slight weekly gain.
South African Rand
Reuters: The South African rand strengthened on Friday ahead of the mid-term budget this week which will provide insight into the health of Africa’s most industrialised economy. At 1615 GMT, the rand traded at 18.8075 to the dollar, about 0.8% stronger than its previous close. The dollar last traded around 0.15% weaker against a basket of global currencies. The rand had a turbulent week, taking direction from global factors, such as U.S economic data, with the few domestic economic indicators in the backseat.
Investors will on Wednesday turn their attention to South Africa’s mid-term budget for clues on the health of the economy, which has been battling high inflation and rolling power cuts. South Africa’s benchmark 2030 government bond was slightly up, with the yield down 4 basis point to 10.660%. Shares on the Johannesburg Stock Exchange fell, with the blue-chip Top-40 index closing 0.75% lower.
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Global Markets
Reuters: Asian share markets were mixed on Monday as Israel’s push into Gaza stirred fears of a wider conflict ahead of central bank meetings in the United States, Britain and Japan, the latter of which might see a policy tightening. The earnings season also continues with Apple, Airbnb, McDonald’s, Moderna and Eli Lilly & Co among the many reporting this week. Results so far have been underwhelming, contributing to the S&P 500’s retreat into correction territory at 4,117. “The price action is bad as SPX could not defend a key 4,200 level; risk is it heads to the 200-week moving average of 3,941 before a trading rally,” BofA analysts said. Early on Monday, S&P 500 futures had edged up 0.3% to 4,151, while Nasdaq futures added 0.5%. EUROSTOXX 50 futures slipped 0.2% and FTSE futures were flat.
Risk appetite was dulled by Israel’s push to surround Gaza’s main city in a self-declared “second phase” of a three-week war against Iranian-backed Hamas militants. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.2%, having hit a one-year low last week. Chinese blue chips firmed 0.1%. China Evergrande Group’s shares fell 20% on Monday as Hong Kong’s High Court hears a winding-up petition against the embattled property developer, nearly two years after it defaulted on its debts. Japan’s Nikkei fell 1.1% amid speculation the Bank of Japan might tweak its yield curve control policy after its two-day policy meeting wraps up on Tuesday.
Many analysts expect the central bank will lift its inflation forecast to 2.0%, but are unsure whether it will finally abandon YCC in the face of market pressure on bonds. “Remaining uncertainty about the wage outlook, combined with stresses in global bond markets could prompt the BOJ to err on the side of caution, making our view that YCC will be scrapped a very close call,” said analysts at Barclays. “The BOJ could still opt to revise policy but less drastically, perhaps by raising the ceiling for 10-year yields as it did in July.”
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Abandoning YCC altogether would likely see Japanese bond yields rise and add to pressure on global markets already bruised by a vicious sell-off in U.S. Treasuries. Yields on 10-year Treasuries stood at 4.87% on Monday, having climbed 30 basis points so far this month and touched 16-year peaks at 5.021%. Sentiment will be tested further this week when Treasury announces its refunding plans, with more increases likely. NatWest Markets expects $885 billion of marketable borrowing in the fourth quarter and $700 billion in the following quarter.
The sharp rise in market borrowing costs has convinced analysts the Federal Reserve will stand pat at its policy meeting this week, with futures implying a 97% chance of rates staying at 5.25-5.5%. The market has also priced in 165 basis points of easing for 2024, starting around mid-year. “The Fed appears to have coalesced around the view that the recent tightening in financial conditions led by higher long-term interest rates has made another hike unnecessary,” said analysts at Goldman Sachs, who estimated the rise in yields was the equivalent of 100 basis points of rate increases.”The story of the year so far has been that economic reacceleration has not prevented further labor market rebalancing and progress in the inflation fight,” they added. “We expect this to continue in coming months.”
Job figures due Friday are forecast to show U.S. payrolls rose a still solid 188,000 in October, after September’s blockbuster gain, but annual growth in average earnings is still seen slowing to 4.0% from 4.2%. The Bank of England is also expected to stay on hold this week, with markets pricing around a 70% chance it is done tightening altogether. Oddly the ascent of U.S. yields has not helped the dollar any higher recently. “Likewise, the fall in global equity markets and the ongoing uncertainty around the Hamas-Israel conflict has not done much to drive the dollar higher against risk-sensitive currencies,” Capital Economics analysts wrote in a note. “This reinforces our sense that a relatively optimistic assessment of the outlook in the U.S. is by now largely discounted in the dollar.”
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The dollar was steady against a basket of currencies at 106.580, having bounced between 105.350 and 106.890 last week. It firmed a touch on the yen to 149.74, but remained short of last week’s top of 150.78. The euro idled at $1.0562, and is almost unchanged on the month so far. In commodity markets, gold was steady at $2,003 an ounce. Oil prices eased as worries about demand outweighed risks to Middle East supplies, at least for the moment. Brent lost 65 cents to $89.83 a barrel, while U.S. crude fell 77 cents to $84.77.
Published by the Mercury Team on 31 October 2023
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