Reuters: Sterling rose to its highest in two months on Monday, as the prospect of steep rate cuts next year by the Federal Reserve dented the dollar, but the pound fell to its lowest since early May against the euro.
Pound Sterling rose to two-month high
The pound got a modest lift from a rise in gilt yields, after Prime Minister Rishi Sunak said his government would turn to cutting tax after a fall in inflation, speaking ahead of this week’s budget update when finance minister Jeremy Hunt is expected to announce how he will speed up the stagnant economy. The pound was up 0.1% on the day at $1.2475, having risen earlier by as much as 0.39% to a session peak of $1.2511, its highest since Sept 13.
The euro was up 0.1% against sterling at 87.61 pence, narrowly below the day’s high at 87.70, its strongest since early May. Hunt said over the weekend he would not deliver tax cuts that might fuel inflation. Official forecasts due on Wednesday are expected to show he has more room for giveaways before running into trouble with fiscal rules than in his annual budget published in March. “Speculation over tax cuts has centred on inheritance tax and perhaps even income tax and national insurance, which would favour workers at the lower end of the income spectrum. Our UK economist does not, however, think this moves the needle for the Bank of England rate story, where we think rates have peaked and the BoE will start easing next August,” ING strategist Chris Turner said.
“Speculation over tax cuts in a risk-positive environment should be good news for sterling. GBP/USD can push up to $1.2590, while EUR/GBP can correct back to 87.00 this week,” he said. Yields on benchmark 10-year gilts were up 5 basis points on the day at 4.153%, underperforming both U.S. Treasuries, which rose 4 bps to 4.478% and German Bunds, which were up 3.8 bps at 2.627%. Money markets show traders believe the Bank of England will cut rates by about 80 basis points over the course of 2024. Just a week ago, 60 bps were priced in.
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U.S. Dollar
Reuters: The dollar slipped to fresh milestone lows on the euro, yen and other major currencies on Tuesday, as China guided the yuan higher and its strength spurred broader softness for the dollar ahead of minutes from the Federal Reserve. China’s central bank set the midpoint of the yuan’s trading band at its strongest since Aug. 7. The yuan hit an almost four-month high of 7.1301 to the dollar in early trade. The euro rose 0.2% to $1.0963, its highest since mid-August and the dollar was testing or breaking chart support on almost every major pair. The yen rose more than 0.5% to its strongest in seven weeks at 147.5 per dollar.
The New Zealand dollar broke through resistance around $0.6050 to trade 0.6% higher at a three-month high of $0.6072 by mid-session in Asia. The Australian dollar rose 0.4% with the tide to hit a three-month high of $0.6585. China’s firm currency fixing came together with a Bloomberg News report on forthcoming support for the property sector which boosted stocks and the mood, said National Australia Bank strategist Rodrigo Catril in Sydney. “It’s encouraging the market to think: ‘OK, cool, we’ve seen the worst of CNY weakness,’” he said, using the currency’s ticker. “They’re telling us they want dollar/CNH lower.”
Bloomberg News reported Chinese regulators are drawing up a list of 50 developers eligible for funding, citing people familiar with the matter. At the same time U.S. yields have fallen in anticipation that U.S. interest rates have peaked, the yen is showing signs of turning and the Aussie is riding an extra tailwind while prices for top export iron ore hit multi-year highs. Minutes of Australia’s November policy meeting showed that the central bank was concerned inflation expectations could become unmoored if it did not raise interest rates.
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The dollar index, which has fallen in seven of the past eight sessions, broke below its 200-day moving average on Monday and was down 0.2% at 103.2 on Tuesday, a 2-1/2-month low. Sterling rose 0.3% to a two-month high of $1.2540. The Swiss franc hovered near its highest since early September. Trade in Scandinavian currencies tends to be light in Asia hours, but the Swedish crown hit a 3-1/2-month high and the Norwegian crown a two-month high. Markets have all but priced out the risk of a further U.S. rate hike in December or next year, and imply a 1-in-4 chance of an easing starting in March.
Fed minutes are due at 1900 GMT and headline the day ahead, along with a speech from European Central Bank President Christine Lagarde. Analysts caution that the dollar’s downward momentum may not have too much further to run. “I think there needs to be a reality check on the fact that the Fed’s take on hawkish bias is not independent of where yields go,” said Mizuho Bank’s Asia head of economics, Vishnu Varathan. “There will be a self-checking mechanism if yields fall too much,” he said. “That means the dollar’s fall might also be impeded, and it’s premature to declare anything one way or another until we see the December Fed meeting.”
Today’s minutes, he said, might be significant if there are changes to the language around the bond market, particularly since bonds have rallied so hard since the Fed met at the end of last month. Ten-year Treasury yields are down almost 50 basis points to 4.40% in November so far. Asia’s emerging market currencies also advanced to fresh highs, though focus will fall on Argentinian markets later in the day where domestic trade is set to resume after the election of libertarian Javier Milei as president.
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South African Rand
Reuters: South Africa’s rand weakened on Monday, with investors looking ahead to inflation data and the central bank’s interest rate decision due later in the week. At 1518 GMT, the rand traded at 18.3900 against the dollar, about 0.3% weaker than its previous close. Local focus will be on inflation figures due on Wednesday and an interest rate decision by the South African Reserve Bank on Thursday as markets look for fresh guidance. “Investors are closely watching for the upcoming local CPI numbers for further market direction. We also have our local interest rate decision with no change expected,” said Andre Cilliers, currency strategist at TreasuryONE.
Last Friday, S&P Global affirmed South Africa’s foreign and local currency ratings, citing benefits from access to deep domestic markets, concessional funding and an actively-traded currency. On the stock market, the Top-40 index closed about 0.5% higher. South Africa’s benchmark 2030 government bond strengthened, with the yield down 2 basis points to 10.055%.
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Global Markets
Reuters: Asian shares climbed to fresh two-month highs on Tuesday, boosted by a rally on Wall Street while the dollar languished near its lowest in two-and-a-half months on expectations the U.S. Federal Reserve is likely done with interest rate hikes. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.91% higher at 509.82 having touched 510.42, the highest since Sept. 18. The index is up 7% for the month and on course for its biggest monthly gain since January. Japan’s Nikkei eased 0.15% after hitting highs not seen since 1990 on Monday. The index is up roughly 28% this year, making it the best performing stock market in Asia. China’s blue-chip CSI300 Index was 0.66% higher, while Hong Kong’s Hang Seng Index gained 1.25% as easing U.S.-Sino tensions lifted sentiment.
On Monday, Wall Street’s three major stock averages rose with Nasdaq’s 1% rally leading the charge as heavyweight Microsoft hit a record high after it hired Sam Altman, who headed OpenAI until he was ousted late last week. Investor focus on Tuesday will firmly be on earnings from Nvidia and also minutes of the Federal Reserve’s last meeting to gauge which way rates are headed. Stock markets have broadly rebounded in November as a flurry of data that showed U.S. inflation might be easing has spurred bets that the Fed is done with monetary tightening and rate cuts may be on the way next year.
Traders have nearly fully priced in the likelihood that the Fed will keep interest rates unchanged in December, and some have started pricing in rate cuts as soon as March, according to the CME Group’s FedWatch tool. Some remain cautious as economic data could change the monetary policy outlook. “It only takes another strong inflation print or more consumer/labour market strength, and rates would head higher again,” said Ben Bennett, APAC investment strategist for Legal and General Investment Management. “My main concern is that we’ll see some disappointing data around the turn of the year, which will focus attention on the risk of recession.”
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Trading is expected to be muted for much of the week ahead of Thursday’s U.S. Thanksgiving holiday and a sparse data calendar for the week. Rob Carnell, ING’s regional head of research for Asia-Pacific, said the markets seem to have run out of internal momentum at the moment and may need an external stimulus to power the next move. Treasury yields were lower in the wake of solid bidding in the $16-billion sale of 20-year Treasury bonds on Monday that suggested the market still anticipates inflation will decelerate and the Fed will cut rates next year.
The yield on 10-year Treasury notes was down 1.2 basis points at 4.410%, while the yield on the 30-year Treasury bond fell 2.1 basis points to 4.554%. Lower yields kept the dollar on the back foot, with the dollar index , which measures the U.S. currency against a basket of six major currencies, down 0.058% at 103.37. The Japanese yen strengthened 0.22% to 148.03 per dollar, having touched a seven-week low of 147.86. The Australian dollar, often seen as a barometer of risk appetite, touched a three-month high of $0.65775 earlier in the session.
The head of Australia’s central bank said on Tuesday inflation will remain a crucial challenge over the next one to two years, in comments made two weeks after policymakers raised interest rates to a 12-year high earlier to tame high prices. Oil prices eased, reversing the previous day’s rally, as concerns over a slowing global economy outweighed the prospect of deepening supply cuts by OPEC and its allies such as Russia. U.S. crude fell 0.05% to $77.79 per barrel and Brent was at $82.23, down 0.11% on the day. The oil market has dropped almost 20% since late September as crude output in the U.S., the world’s top producer, held at record highs, while the market was concerned about demand growth, especially from China, the No. 1 importer of oil.
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Published by the Mercury Team on 21 November 2023
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