On Monday, the dollar was moderately strong against a basket of currencies, as traders anticipated a flurry of central bank meetings this week.
US DOLLAR CAUTIOUSLY FIRM
Reuters: The dollar strengthened on Monday and pulled away from an eight-month low ahead of a flurry of central bank meetings this week, including the Federal Reserve’s, with traders closely focused on advice for the path of future interest rate increases. The U.S. dollar index, which measures the greenback versus a basket of currencies, increased by 0.03% to 101.92, easing away from the eight-month low of 101.50 reached last week. Nonetheless, it was on course for a fourth consecutive monthly decline of 1.5%, weighed down by views that the Fed was reaching the end of its rate-hike cycle and that interest rates would not need to climb as much as originally anticipated. The British pound rose 0.01% to $1.24005, while the New Zealand dollar rose 0.09% to $0.6500. Ahead of this week’s policy meetings by the Federal Reserve, the European Central Bank, and the Bank of England, trading activity was muted.
“We will range trade a bit as the market attempts to gauge the behavior of central banks…. Rodrigo Catril, a currency strategist at National Australia Bank, believes that for all three leaders, words will carry more weight than deeds. The Fed is widely expected to raise rates by 25 basis points, while the ECB and BoE will likely boost rates by 50 basis points apiece. The euro was last trading at $1.08705, up 0.03%, and was on course for a monthly rise of about 1.5%, its fourth consecutive month of gains. The single currency has received support from the ECB’s sustained hawkish rhetoric and diminishing prospects of a severe recession in the euro zone. The Australian dollar increased by 0.11% to $0.71175, while the Japanese yen declined slightly to 129.94 per dollar.
Core consumer prices in Japan’s capital for the month of January rose at the quickest annual rate in nearly 42 years, according to statistics released on Friday, putting pressure on the Bank of Japan to reduce its economic stimulus. With China’s return from the Lunar New Year holiday on Tuesday, all eyes will be on the release of its purchasing managers’ index data. Catril of NAB stated, “The market will be looking… hopefully not to be disappointed.” “Up to this point, the data or vibes emanating from China do lend credence to the notion that a prosperous reopening in terms of economic activity is likely to occur.” After authorities lifted COVID-19 travel restrictions, the number of Chinese citizens traveling domestically for the Spring Festival increased by 74% compared to the previous year, official media said on Saturday. The offshore yuan was recently valued at 6.7465 per dollar, an increase of more than 0.1%.
THE BRITISH POUND
Reuters: Friday saw a little decline in the value of the pound against the dollar, but it was not far off its highest level in almost seven months. Investors anticipate that the British economy’s decline will soon terminate the Bank of England’s tightening cycle, a move that could temporarily weaken the pound. In January, economic activity in the British private sector decreased at the fastest rate in two years, according to a poll released on Tuesday. In anticipation of a turn in the Bank of England’s (BoE) cycle, a number of experts reported large short positions in sterling. The Bank of England appears to be on track to raise its key interest rate by 0.5 percentage points to 4% on February 2, but economists will be on the lookout for indications that this 10th consecutive rate hike will be one of the last.
At $1.238, the pound fell 0.25% against the dollar. On January 23, it reached its highest level since June 10 at $1.2447. The U.S. dollar index remained relatively constant as traders prepared for a crucial week in which the central banks responsible for the dollar, the pound, and the euro will meet. At 87.95 pence per euro, the pound declined 0.2% versus the euro. Nonetheless, other economists are bullish on the pound in the medium term because, according to them, the markets have already priced in the worst-case scenario for the British economy. “We may have reached or be close to reaching ‘peak pessimism’ regarding the United Kingdom, and GBP could see better times ahead,” said Derek Halpenny, head of global market research at MUFG. “Fiscal credibility has improved, and in the context of falling global inflation and improved market conditions, external financing concerns would diminish,” he continued.
Friday, British finance minister Jeremy Hunt pledged to address the nation’s low productivity with post-Brexit growth-enhancing changes. The markets are also monitoring discussions surrounding the so-called Northern Ireland Protocol, which might assist boost the pound’s sentiment. Better relations, according to analysts, might help generate stronger trust and allow for greater flexibility in other areas to eliminate trade barriers with the EU and ease what some market participants view as a difficult Brexit agreement. Irish Prime Minister Leo Varadkar stated on Wednesday that it is unclear whether the United Kingdom and the European Union can reach an agreement on amending post-Brexit trade rules for Northern Ireland in time for the mid-April anniversary of the region’s 1998 peace agreement.
SOUTH AFRICAN RAND
Reuters: The South African rand stabilized on Friday, a day after suffering losses when the central bank lifted interest rates less than anticipated the day before. At 14:40 GMT, the rand’s value against the dollar was 17.2050, not far from its previous close of 17.2000. Thursday, the South African Reserve Bank increased its repo rate by 25 basis points to 7.25%, less than the 50-bp increase anticipated by the majority of analysts polled by Reuters and following three consecutive 75-bp increases.
“The less hawkish stance was immediately reflected in the depreciation of the rand,” ETM Analytics wrote in a note. ETM Analytics stated that Thursday’s decision shows South Africa has reached its peak interest rate or that there may be no more than a 25-bp increase left in a cycle that began in November 2021. The All-share index of the Johannesburg Stock Exchange increased by around 0.4%. The yield on the government’s 2030 bond decreased by 3.5 basis points to 9.675%.
GLOBAL MARKETS
Reuters: Asian stocks became cautious on Monday ahead of a week that is guaranteed to see interest rate hikes in Europe and the United States, as well as U.S. employment and pay statistics that could impact how much further they can go. Wall Street bulls, seeking to catapult the Nasdaq to its best January since 2001, will be put to the test by earnings from a who’s who of tech companies. As China’s fast reopening bolsters the economic outlook, Asia has not lagged behind, with MSCI’s broadest index of Asia-Pacific equities outside Japan climbing 11% in January to a nine-month high. The index fell 0.2% on Monday as markets across the region were mixed. Taiwan’s index rose 3.1%, while the Nikkei remained unchanged. The Nikkei newspaper stated that Renault will reduce its stake in Nissan to 15%, while Nissan would invest in Renault’s electric vehicle (EV) sector. After returning from the holidays, Chinese blue chips increased 1.1%. Beijing stated that domestic travel for the Lunar New Year increased by 74% compared to the previous year, although this was still only half of pre-pandemic levels.
Futures for the S&P 500 and the Nasdaq both fell 0.3%, while futures for the EUROSTOXX 50 and the FTSE fell 0.2%. Investors are convinced that the Federal Reserve will raise interest rates by 25 basis points on Wednesday, followed by rate hikes of half a point by the Bank of England and European Central Bank the following day; any variation from this script would be a major surprise. Equally crucial will be the direction on future policy, with analysts anticipating a hawkish message that inflation is not yet under control and additional action is required. “With U.S. labor markets remaining tight, core inflation remaining elevated, and financial conditions loosening, Fed Chair Powell’s tone will be hawkish,” said Bruce Kasman, chief economist at JPMorgan, who anticipates another rate hike in March. We also anticipate that he will continue to resist market pricing of rate decreases later this year.
Futures indicate that interest rates will peak at 5.0% in March before falling back to 4.5% by the end of the year. The yields on 10-year notes have decreased 33 basis points so far this month to 3.50 percent, thereby improving financial conditions despite the Fed’s strong language about tightening. This dovish outlook will also be challenged by U.S. payroll data, the employment cost index, and other ISM surveys. If the ECB announces a half-point rate hike for March or opens the possibility to a halt in the pace of tightening, EU inflation data might be crucial. Regarding the recent bounce on Wall Street, a great deal will depend on the profits of Apple Inc, Amazon.com, Alphabet Inc, and Meta Platforms, among many others. Wedbush analysts said that Apple will provide a view into the global consumer demand picture and a snapshot of the China supply chain concerns that are beginning to improve.
“Based on our recent supply chain checks in Asia, we believe that iPhone 14 Pro demand is more robust than anticipated,” they continued. We do not anticipate huge layoffs, but Apple will undoubtedly reduce costs in the periphery. Market pricing of early Fed easing has been a burden for the dollar, which has lost 1.6% against a basket of key currencies so far this month and stands at 101.790.00 The euro rose 1.5% in January to $1.0878, just shy of a nine-month high. Despite the Bank of Japan’s relentless defense of its ultra-easy policies, the dollar has shed 1.3% against the yen to 129.27. The decline in the currency and yields has been a benefit for gold, which has risen 5.8% to $1,930 per ounce so far this month. The swift reopening of China is viewed as a boon for commodities in general, boosting copper, iron ore, and oil prices. On Monday, Brent crude fell 11 cents to $86.55 a barrel, while U.S. crude fell 3 cents to $76.55 per barrel.
»Dollar strengthens cautiously ahead of a busy central bank week«