Reuters: The dollar set for weekly slide for months against the euro, yen and franc on Friday, as investors sold in anticipation of almost 100 basis points of U.S. interest rate cuts next year.
U.S. Dollar
At $1.0854 to the euro, the dollar has shed 1.6% for the week, its steepest fall since mid-July. It is also down 1.6% for the week to 0.8882 Swiss francs and has even lost 0.6% to trade at 150.53 on the out-of-favour yen. Oil hit four-month lows on Thursday and Walmart said it will cut prices, adding to the disinflationary pressures that data this week showed had steadied U.S. consumer prices and convinced investors inflation is in retreat and rate increases are over.
Thursday’s batch of weak U.S. economic data also reinforced that stance. Futures markets have priced in 98 basis points of Fed rate cuts next year, compared with 73 bps a week ago. “While the amount of easing factored in appears aggressive, the direction of travel looks right,” said Peter Dragicevich, strategist at cross-border payments firm Corpay in a note. “The U.S. inflation pulse has turned, and the negative consequences of past policy tightening is starting to manifest,” he said. “As the next Fed easing cycle comes into view, U.S. yields move lower, and U.S. growth comes back to the pack, we are looking for the USD to gradually deflate over the next few quarters.”
Sterling is up 1.5% for the week at $1.2410. The Australian and New Zealand dollars lost a bit of shine on Thursday, when signs of a slowing U.S. economy knocked commodity prices but they remain set for weekly gains. Moves in Asia trade on Friday were small, leaving the Aussie at $0.6466, up 1.7% on the week, and the kiwi at $0.5960, up 1.2% on the week. China’s yuan was eyeing its best week in two months and traded near a three-month high at 7.2447 per dollar. “As soon as markets become confident a Fed rates peak is in prevailing dollar strength will be seen to be on borrowed time,” strategists at National Australia Bank said in a note. Several European Central Bank speakers appear later on Friday, British retail sales data is due along with U.S. housing starts. In cryptocurrencies, bitcoin is set to snap a four-week winning streak with a modest 1.8% fall to $36,416.
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British Pound
FXStreet: GBP/USD moves sideways with a negative tone near 1.2410 during the Asian hours on Friday. The US Dollar receives upward support despite the upbeat jobless claims data from the United States and a decline in the US Treasury yields. US Continuing Jobless Claims for the week ending on November 3 increased to the highest level since 2022 at 1.865 million, compared to the previous reading of 1.833 million. Additionally, Initial Jobless Claims for the week ending on November 10 rose to 231,000, exceeding the expected 220,000, and marking the highest level in nearly three months.
Despite these challenging labor market indicators, the US Dollar Index recovered ground. Notably, the yield on the 10-year Treasury note bottomed at 4.43% on Thursday. However, it’s observed that the DXY bids lower around 104.30 at the time of writing. Federal Reserve speaker has taken to the news wires to push back against expectations of rate cuts. Cleveland Fed President Loretta Mester, in particular, emphasized that the US central bank is data-dependent when considering whether to raise rates further. This stance reflects the nuanced approach that the Fed is taking in response to economic conditions.
The UK inflation report for October revealed a notable decline in the annual rate of the Consumer Price Index, dropping to 4.6% from the previous level of 6.7%. The monthly rate also eased to 0.0%, falling short of the expected 0.1%. Core CPI (Year-on-Year) also contracted to 5.7% from the previous reading of 6.1%. Despite the Bank of England emphasizing the need for higher rates, market participants are not anticipating more rate hikes. Investors await key economic indicators, focusing on UK Retail Sales and US housing data. These releases are anticipated to provide fresh insights into the economic activities of both countries, shaping market sentiment and potentially influencing trading decisions in the GBP/USD pair.
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South African Rand
Reuters: South Africa’s rand weakened against the dollar on Thursday, slowly unwinding a rally that had sent the currency up more than 2% on Tuesday. At 1515 GMT, the rand traded at 18.3200 against the dollar, about 0.7% weaker than its previous close. The dollar was down around 0.2% against a basket of global currencies. The rand leapt on Tuesday after softer-than-expected U.S. consumer inflation data boosted expectations that the Federal Reserve might be done with interest rate hikes. But the South African currency struggled to firm on Wednesday despite better-than-expected local retail sales data.
“With limited key U.S. data until the end of the month, the risk is that we just repeat the pattern seen after the good payrolls figure: global markets, and so the ZAR, slowly unwind the rally,” Rand Merchant Bank analysts said in a briefing. Like other risk-sensitive currencies, the rand often takes its cues from global factors such as U.S. economic data. Andre Cilliers, currency strategist at TreasuryONE, said in a note he expected to see some consolidation and profit-taking given the scale and pace of the rand’s strengthening.
On the Johannesburg Stock Exchange the blue-chip Top-40 and the broader all-share index ended the day about 1.4% lower. South Africa’s benchmark 2030 government bond was stronger, with the yield down 13.5 basis points to 10.070%.
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Global Markets
Reuters: Asian shares took a breather on Friday as a batch of softer U.S. economic data took some of the steam out of Wall Street, but also boosted bonds in a big way while slugging oil prices in a boon for the inflation outlook. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.4% from a two-month high, but still up 3.1% so far for the week in its best performance since July. Both Brent and U.S. crude slid almost 5% on Thursday to four-month lows in a move that was blamed on economic and supply concerns, though technical selling likely played a part when the $80 bulwark broke. Dealers suspected algorithmic and trend-following funds drove the speculative sell off with much of the losses coming in just a single hour of trade.
Brent was last down 10 cents at $77.36 a barrel, and a world away from the $97.69 top hit in late September, while U.S. crude eased 7 cents to $72.83. Whatever the cause, the rout should put added downward pressure on consumer prices across the globe and reinforce expectations of policy easing next year. Adding to the disinflationary theme was commentary from Walmart executives that costs were “more in check” and they were planning on cutting prices for the holiday season. Equity investors were not as impressed with the idea of margin compression and knocked Walmart shares down 8%, while a drop in energy stocks dragged on the S&P 500.
Early Friday, S&P 500 futures were all but flat, as were Nasdaq futures. EUROSTOXX 50 futures gained 0.3% and FTSE futures 0.2%. Japan’s Nikkei added 0.2%, to be 2.8% firmer for the week, helped by reassurance from the Bank of Japan that it was sticking with its super loose policy. Chinese blue chips were a fraction lower, having missed on the general rally so far this week. Sentiment in Asia was supported by the apparent easing of tensions between the United States and China, with the Chinese press lauding the meeting between President Xi Jinping and President Joe Biden.
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Japanese Prime Minister Fumio Kishida was also set to hold talk with Xi at the APEC summit. Bond markets were still cheering this week’s benign U.S. inflation report, with futures now pricing in almost zero chance of another rate hike from the Federal Reserve and a 34% probability it might ease as early as March. The market is pricing in 98 basis points of cuts next year, compared with 73 basis points a week ago. “With labor market activity slowing and further disinflation expected, we see the Fed on hold before starting to lower rates in the second half of 2024 to avoid a recession,” wrote analysts at JPMorgan in a note.
“We forecast the policy rate to drop 100 basis points in 2H24 to end the year at 4.5%, before settling on hold at 3.5% by 1Q25.” Treasury investors were looking to price in a little of that right now with yields on two-year treasuries down a whopping 21 basis points for the week at 4.85%. That was their best weekly performance since March. Ten-year note yields stood at 4.44%, having fallen 18 basis points for the week so far, a rousing rally from the 5.02% high hit just a month ago.
The sea change in market pricing for the Fed has left the dollar looking soggy, with the euro up at $1.0853 and holding gains of 1.6% for the week so far. The dollar even lost ground to the yen, easing to 150.67 yen and away from a 151.92 peak hit early in the week. It fared better against commodity-linked currencies such as the Canadian dollar, which were hampered by the slide in oil. The drop in bond yields proved bullish for gold, which nudged up to $1,982 an ounce.
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Published by the Mercury Team on 17 November 2023
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