Reuters: The U.S. dollar retreated from a two-week top against its major peers on Thursday as investors trimmed bets that the Federal Reserve will raise interest rates this month, though the looming debt ceiling deadline gave safe haven support to the greenback.
US Dollar retreated
A divided U.S. House of Representatives passed a bill to suspend the $31.4 trillion debt ceiling on Wednesday, with the focus now on how it will fare in the Democratic-led Senate just days before the federal government is expected to run out of money to pay its bills. The dollar was mixed in Asia trade and barely reacted to the vote, with the euro rising 0.04% against the greenback to $1.06895. Sterling slipped 0.01% to $1.2440. The U.S. dollar index rose 0.06% to 104.21, though was still down from an over two-month high hit in the previous session, as traders pared back their expectations of another rate hike by the Federal Reserve this month. Fed officials including the vice chair-designate pointed towards a rate hike “skip” in June, giving time for the U.S. central bank to assess the impact of its tightening cycle thus far against still strong inflation data.
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Markets are now pricing in a roughly 26% chance that the Fed will raise rates by 25 basis points at its upcoming meeting, as compared to a near 67% chance a day ago, according to the CME FedWatch tool “The recent run of U.S. economic data does favour another rate hike in the near-term, although our baseline is that the FOMC is already done with its current tightening cycle,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. Elsewhere, the Japanese yen rose nearly 0.1% to 139.24 per dollar. Japan’s financial authorities met earlier this week in the wake of the yen’s slide to a six-month low against the U.S. dollar, where the country’s top diplomat said that Japan will closely watch currency moves and won’t rule out any options.
In Asia, the Chinese offshore yuan rose over 0.1% to 7.1077, reversing some of its losses from the previous session, when it slumped to a six-month low. China’s factory activity unexpectedly swung to growth in May from a decline in April, a private sector survey showed on Thursday, driven by improved production and demand, helping struggling firms that have been hit by slumping profits. The yuan had fallen nearly 3% against the dollar in both the onshore and offshore markets in May, as China’s post-COVID economic recovery struggles to gain steam. On Wednesday, the official manufacturing purchasing managers’ index data showed that China’s factory activity shrank faster than expected in May, falling to a five-month low of 48.8. “On net, the path of least resistance for USD/CNH is to the upside considering the negative RMB carry, push-back in China’s reopening momentum and foreign outflows,” said OCBC currency strategist Christopher Wong.
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The weak economic data out of China also dragged the Australian and New Zealand dollars to their lowest in more than six months in the previous session, with both currencies struggling to recoup their losses on Thursday. The Aussie rose 0.02% to $0.6505, while the kiwi fell 0.07% to $0.6017. The antipodean currencies are often used as liquid proxies for the yuan. “Until a broader stimulus program is unveiled, the yuan won’t find a bid, especially with the People’s Bank of China set to loosen monetary policy first,” said strategists at Macquarie. “Inevitably, further weakening in the yuan could put new upward pressure on the USD vs the majors too, extending the strength in the USD seen since early May for a bit more.”
British Pound
Reuters: Sterling hit a 5-1/2 month high against the euro on Wednesday after data showing lower inflation in major European markets, but fell against the dollar as investors eyed Bank of England rate expectations for the pound’s direction. The euro dropped to as low as 86.27 pence, its weakest since Dec. 15, and was last trading down 0.2% at 86.32 pence after inflation data from France and several major German states came in under expectations. That caused European yields to fall and the euro to drop 0.6% against the dollar to a two-month low. Versus the dollar, the pound was down 0.44% at $1.23585 as the U.S. currency benefited across the board from market jitters after poor Chinese economic data sent investors seeking the safety of the greenback. The pound was also dragged lower in the slipstream of the euro.
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More broadly, investors were looking at expectations for the Bank of England’s main interest rate for indications about where the pound trades from here. “Compared to where we were last week, we’ve seen almost a full rate hike come out of the expectations for the terminal rate, that’s a big shift,” said Nick Rees, FX market analyst at Monex Europe. “This reversal has actually been positive for sterling, which is the opposite of the way we would normally think of it. If you have another three or four rate hikes, that puts the UK into recession, which would weigh on sterling more than the positive benefits of the extra carry.” He said this move had provided a boost for sterling against the euro, and put a floor under sterling against the dollar. The euro is down around 1.5% against the pound in May, which would be the biggest monthly decline since October.
South African Rand
Reuters: South Africa’s rand retreated on Wednesday, circling near a record low hit in the previous session, as weak manufacturing data for China hit commodity currencies and the dollar rose on weakening European inflation. The rand has in May lost more than 7% against the dollar, as investor sentiment soured over factors including a heightened power crisis and U.S. allegations, denied by South Africa, that it supplied weapons to Russia last year. At 1100 GMT, the rand traded at 19.7550 against the dollar, around 0.4% weaker than its previous close after earlier falling as low as 19.8500 to the dollar. The dollar was up more than 0.4% against a basket of global currencies.
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The rand touched an all-time low of 19.8600 to the dollar on Tuesday. Some analysts believe it will reach 20 to the dollar. Data showing China’s manufacturing sector had not rebounded, as some investors wanted, contributed to Wednesday’s rand weakness, said Casparus Treurnicht, a portfolio manager at Gryphon Asset Management. China is South Africa’s biggest trading partner. Shares on the Johannesburg Stock Exchange also fell, with the blue-chip Top-40 index down around 0.4%. But South Africa’s benchmark 2030 government bond was marginally firmer, the yield down 1.5 basis points to 11.300%.
Global Markets
Reuters: Most Asia-Pacific stock markets rose on Thursday amid receding bets for a U.S. rate hike this month and relief over the passage of the U.S. debt ceiling bill through the House. The dollar sagged to a one-week low versus the yen and hung close to Wednesday’s more-than-two-month trough to the euro after Federal Reserve officials including Governor and vice chair nominee Philip Jefferson pointed to a rate hike “skip” at the June 13-14 policy meeting. Treasury yields rose slightly from nearly two-week lows. Crude oil prices edged off four-week lows following a surprise swing back to growth in a private survey of Chinese factory activity, with an OPEC+ meeting looming on the weekend. MSCI’s broadest index of Asia-Pacific shares gained 0.45%, rebounding after touching the lowest level since March 22 in the previous session.
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Japan’s Nikkei added 0.29%, while Hong Kong’s Hang Seng gained 0.5% and mainland Chinese blue chips advanced 0.53%. A divided House passed a bill to suspend the $31.4 trillion debt ceiling – and avert a catastrophic default – with majority support from both Democrats and Republicans, stoking optimism that it can move through the Senate before the weekend. “This has gone through with a very big majority, so there’s enough bipartisan support that it’s very hard to believe this isn’t going to be even more of a formality in the Senate,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank. “”What this does is it turns the attention to the incoming data and the Fed meeting this month,” Attrill added.
Money markets currently lay about 38% odds for a hike on June 14, swinging back from about 70% earlier in the day, after some unexpectedly hot jobs numbers. However, shortly after, the Fed’s Jefferson said skipping a rate hike in two weeks would provide policymakers time to see more data before making a decision. Philadelphia Fed President Patrick Harker also said on Wednesday that for now he is inclined to support a “skip” in rate hikes. The dollar was little changed at 139.435 yen after slipping to the lowest since May 25 at 138.96 earlier in the session. The euro was flat at $1.06905. It sank as low as $1.0635 on Wednesday for the first time since March 20.
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Benchmark 10-year U.S. Treasury yields edged up to 3.6655% in Tokyo, after dipping to 3.6140% overnight for the first time since May 18. Brent crude futures for August delivery rose 46 cents, or 0.63% to $73.06 a barrel, while U.S. West Texas Intermediate crude added 40 cents, or 0.59%, to $68.49 a barrel.
Published by the Mercury Team on 1 June 2023
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