In anticipation of central bank meetings, investors are dumping the dollar as it approaches its lowest level in eight months due to a lackluster earnings season and fears of a probable recession.
Reuters: The dollar hovered near an eight-month low against its rivals on Thursday, as a dismal corporate earnings season in the United States fueled fears of a recession and as traders remained vigilant ahead of a flurry of central bank meetings next week. The U.S. dollar index, which measures the greenback against a basket of currencies, was last seen at 101.53, lingering near its eight-month low of 101.51 from the previous week. Australia was on vacation on Thursday, while many Asian countries were still celebrating the Lunar New Year. In response to disappointing profits and outlook from U.S. corporations and a spate of layoffs in the tech industry, investors have reduced their expectations regarding how much longer the Federal Reserve will need to rapidly raise interest rates. Wells Fargo economists stated, “There are now indications that the U.S. economy may be slowing more significantly.”
We currently believe that the U.S. dollar has entered a period of cyclical devaluation against most foreign currencies, as the Fed is no longer driving interest rate hikes and U.S. economic indicators are expected to weaken. Next Monday, the Fed’s policy-setting committee will begin a two-day meeting, and the markets have priced in a 25-basis-point interest rate increase, a reduction from the central bank’s 50-basis-point and 75-basis-point hikes from the previous year. The markets anticipate that policymakers at the Bank of England and European Central Bank, who will both meet next week, would raise interest rates by 50 basis points. The ECB is expected to maintain its hawkish stance. The British pound was recently up 0.12% at $1.2415, while the euro gained 0.05% to $1.0920, flirting with its nine-month high of $1.0927, which was reached on Monday. The euro attracts a great deal of interest, according to Kiwibank’s chief economist, Jarrod Kerr. The euro zone “enjoyed a prosperous winter. The predicted energy catastrophe has not yet materialized.
Overseas, the Canadian currency last traded at 1.3393 per dollar, after the Bank of Canada hiked its key interest rate to 4.5 percent on Wednesday but became the first major central bank combating global inflation to warn it would likely delay future hikes for the time being. The Australian dollar rose 0.06% to $0.7107, after gaining 0.8% on Wednesday in response to shocking data indicating that Australian inflation climbed to a 33-year high in the previous quarter, reinforcing the argument for the Reserve Bank of Australia to raise interest rates again next month. The kiwi stabilized at $0.6480 after falling 0.43 percent in the previous session as a result of lower-than-anticipated fourth-quarter annual inflation in New Zealand. The Japanese yen increased 0.3% to 129.21 per dollar in Asia. At their January meeting, Bank of Japan policymakers discussed the inflation outlook, with some expressing concern that it may take some time for wages to increase stably, according to a Thursday summary of their comments. At that meeting, the BOJ did not alter its ultra-low interest rates, but it did enhance a monetary policy instrument to keep the 10-year bond yield from exceeding its new 0.5% ceiling. Its decision contradicted market expectations for additional monetary policy adjustments.
The pound sank against the dollar and the euro on Wednesday, according to Reuters, as statistics revealed that British manufacturers unexpectedly lowered their pricing in December, suggesting that inflation may be reducing ahead of the Bank of England’s policy meeting next week. The pound fell almost 0.37 percent to $1.22950 and approximately 0.15 percent against the euro to 88.40 pence. According to data released on Wednesday, British manufacturers unexpectedly dropped their pricing in December by the greatest amount since April 2020. The news that British firms have dropped prices will likely alleviate some of the burden on Bank of England policymakers, who must decide how far to raise interest rates to combat inflation.
Traders continue to anticipate a recession, as private-sector economic activity fell at the sharpest rate in two years in January, with businesses blaming rising Bank of England interest rates, strikes, and weak consumer spending. The growing cost of debt was also reflected in data released on Tuesday indicating that the British government borrowed more last month than in any December in the thirty-year history of monthly records. “Yesterday’s data were unfavorable and revealed a somewhat divergent outlook compared to the EU, where things are looking somewhat brighter,” said Stuart Cole, chief macro economist at Equiti Capital.
Inflationary pressures are easing, as shown by yesterday’s PPI data, which casts doubt on the extent to which the Bank of England will ultimately hike interest rates. In order to combat inflation, the market anticipates that the BoE will raise interest rates for the ninth time since late 2021. The markets presently assign a 75% probability to a 50 basis point rate hike at the BoE meeting. Next week, both the Federal Reserve and the European Central Bank will have policy meetings. In order to combat inflation, the market anticipates that the BoE will raise interest rates for the ninth time since late 2021. The markets presently assign a 75% probability to a 50 basis point rate hike at the BoE meeting. Next week, both the Federal Reserve and the European Central Bank will have policy meetings.
SOUTH AFRICAN RAND
Reuters: Wednesday saw minimal change in the South African rand as investors awaited Thursday’s interest rate decision. At 16:40 GMT on Wednesday, the rand was trading at 17.1800 against the U.S. dollar, down from Tuesday’s closing price of 17.1850. While investors await the SARB’s decision and guidance tomorrow, there is a definite reluctance to embrace any meaningful directional momentum, ETM Analytics stated in a research note. Eleven of twenty economists surveyed by Reuters last week anticipate that the South African Reserve Bank will raise rates by 50 basis points to 7.50 percent at its monetary policy meeting on Thursday. Eight estimate an increase of 25 basis points, while one predicts no change.
ETM Analytics stated in a report. Eleven of twenty economists surveyed by Reuters last week anticipate that the South African Reserve Bank will raise rates by 50 basis points to 7.50 percent at its monetary policy meeting on Thursday. Eight estimate an increase of 25 basis points, while one predicts no change. After this week, the majority of economists polled by Reuters anticipate no further rate hikes. “Any comments that appear aggressive will help the rand recover lost ground,” stated ETM. In 2023, crippling power shortages dragged on the rand, with beleaguered state utility Eskom announcing a rise in the severity of disruptions for the remainder of the week on Wednesday.
The All-share index of the Johannesburg Stock Exchange closed with a loss of roughly 0.4%. The yield on the benchmark 2030 government bond increased 1 basis point to 9.65 percent, reflecting a decline in price.
Reuters: Asian stocks reached a new seven-month high on Thursday, with Hong Kong shares playing catch-up to other markets’ advances as trading resumed following the three-day Lunar New Year holiday. MSCI’s broadest index of Asia-Pacific equities outside Japan rose 0.56 percent to 555.81. The Hang Seng index increased by 1.6%. Japan’s Nikkei was, however, 0.25% down. Australia was closed for a holiday on Thursday, and several Asian countries, including China, were still on vacation for the Lunar New Year. The Bank of Canada on Wednesday became the first major central bank to suggest it would likely hold off on future rate hikes for the time being, boosting traders’ hopes that the U.S. Federal Reserve may soon moderate its aggressive rate hike stance. In response to signals of decelerating inflation, the U.S. central bank is widely expected to raise interest rates by 25 basis points next week, down from a series of massive rate hikes last year.
Saxo strategists wrote in a client note, “Today’s US GDP report will be crucial in determining whether the market’s shifting expectations in favor of a soft landing rather than a recession can continue to hold.”
The potential of a less aggressive rate of monetary tightening has fueled anticipation of a so-called soft landing – a scenario in which inflation declines amid a backdrop of weakening but durable economic growth. However, lackluster corporate profits thus far have reignited concerns about the Fed’s restrictive policy’s influence on the economy, and the S&P 500 closed lower overnight. Boeing Co posted a bigger loss for 2022 due to difficulties in its military segment and warned of additional supply chain issues on Wednesday. The U.S. aircraft manufacturer missed Wall Street’s forecasts for sales and earnings per share in the fourth quarter.
Next week’s Bank of England and European Central Bank meetings will also be closely watched by investors. Traders will be searching for hints as to when the central banks will likely become dovish. The dollar index, which measures the U.S. currency against six major rivals, was at 101.57 on the currency market, not far from the eight-month low of 101.51 it reached last week. The Japanese yen strengthened by 0.32 percent to 129.19 per dollar, while sterling gained 0.06% to $1.2407. The yield on 10-year Treasury notes decreased by 1.7 basis points to 3.445%, whilst the rate on 30-year Treasury bonds decreased by 2.2 basis points to 3.602%. A portion of the U.S. Treasury yield curve that measures the difference between rates on two- and 10-year Treasury notes and is viewed as an indicator of economic expectations was -68.8 basis points negative. According to researchers, the inversion of this curve predicted eight of the last nine recessions. The yield on the two-year U.S. Treasury, which normally fluctuates in tandem with interest rate forecasts, decreased by 0.6 basis points to 4.131%.
U.S. West Texas Intermediate (WTI) crude increased 0.42 percent to $80.49 per barrel, while Brent crude rose 0.14 percent to $86.24 per barrel, a daily increase of 0.1 percent. On Thursday, gold prices reached a nine-month high, with spot gold remaining unchanged at $1,946.73 per ounce after reaching its highest level since April 2022.