The Daily Brief is a free email sent out each morning with information about overnight market movements and insights into the issues of the day. The brief is free and will help you keep an up-to-the-minute eye on the currency markets.
24 / 06 / 21
Reuters: Sterling traded just off 2-1/2 month highs hit against the euro earlier on Wednesday as euro zone surveys of purchasing managers outshone Britain’s, while the British currency gained for a third session against the dollar. Recent movements in the pound have been dollar-driven, as investors price in earlier than expected tapering of asset purchases by the Federal Reserve after the U.S. central bank last week signalled higher rates in 2023. But Wednesday’s PMIs put the focus squarely back on data.
Inflation pressures faced by British firms hit record levels this month, and growth in the private sector cooled only slightly from an all-time high in May when coronavirus restrictions were lifted, a survey showed on Wednesday. The preliminary reading of the IHS Markit/CIPS UK Composite Purchasing Managers’ Index (PMI) pointed to one of the strongest monthly improvements in business activity since 1998, with a reading of 61.7 - not far off May’s unprecedented 62.9. The PMI for the services sector dipped to 61.7 in June from 62.9 in May. The index for the smaller manufacturing sector fell to 64.2 from 65.6. Meanwhile, euro zone business growth accelerated at its fastest pace in 15 years this month as the easing of more lockdown measures and the unleashing of pent-up demand drove a boom in the bloc’s dominant services industry, a survey showed.
The pound lost some of its morning gains to the euro after the data. By 1233 GMT, sterling was 0.2% higher against the euro at 85.41, having hit 85.30 pence - its highest since April 6 - earlier in the session. Against the dollar, sterling was higher by 0.3% at $1.3989, up for a third straight session. “Stronger eurozone PMI responses and a weaker UK survey may have contributed to sterling weakening against the euro as the data were released over the morning,” said Oliver Blackbourn portfolio manager at Janus Henderson. “However, it is unlikely that the data changes the picture for the Bank of England tomorrow,” he said, referring to a meeting of the bank’s Monetary Policy Committee on Thursday. Britain’s top central bank officials still appear divided over whether to pull the plug on their 875 billion-pound ($1.2 trillion) government bond purchase programme, after inflation hit its highest in nearly two years.
Elsewhere, on the fifth anniversary of the Brexit referendum, European Union member states informally agreed to grant Britain a three-month extension to one of the contentious aspects of the post-Brexit Northern Ireland protocol, Irish national broadcaster RTE reported. London asked Brussels last week for the extension to allow time to resolve a dispute over whether chilled meat products such as sausages, produced in mainland Britain, can continue to be sold in British-ruled Northern Ireland. The protocol essentially keeps Northern Ireland in the EU’s customs union and adhering to many of its single market rules to avoid creating trade barriers with EU member Ireland and thereby putting at risk the 1998 Good Friday peace agreement. Meanwhile, Britain has delayed the final phase of its economy’s reopening by a month to July 19, aiming to use the extra time to speed up the country’s vaccination programme. Sterling has been among the top performing ‘G10’ currencies this year on bets that Britain’s economy will reopen quicker than its peers due to its rapid progress with the COVID-19 vaccination programme. About 80% of Britain’s adult population has now received a first dose.
Reuters: The U.S. dollar vacillated below an 11-week high versus major peers on Thursday as traders attempted to navigate conflicting signals from Federal Reserve officials on the timing of a withdrawal of monetary stimulus. The dollar index, which measures the greenback against six rivals, stood at 91.847 in Asia after rebounding from as low as 91.509 on Wednesday. It was as high as 92.408 at the end of last week, the strongest since April 9. The U.S. currency got some support overnight as two Fed officials said that a period of high inflation in the United States could last longer than anticipated, a day after Fed Chair Jerome Powell had played down rising price pressures.
Atlanta Fed President Raphael Bostic and Fed Governor Michelle Bowman said that while they largely agree recent price increases will prove temporary, they also feel it may take longer than anticipated for them to fade. The dollar index jumped as much as 2.1% last week after the Fed surprised markets on June 16 by saying that policymakers are forecasting two interest rate hikes in 2023. But the index gave up about a third of those gains after Powell on Tuesday said that inflation is climbing due to a “perfect storm” as the economy reopens from the COVID-19 pandemic, and that those price pressures should ease on their own. Six Fed officials are due to speak on Thursday, including New York Fed President John Williams, who on Tuesday said any conversation about when to adjust interest rates is still far off.
“The market has shifted back into price discovery mode, reflecting the Fed’s recent shift and the need to fine-tune the taper lift-off date,” Mark McCormick, the global head of foreign-exchange strategy at TD Securities, wrote in a client note. “Good U.S. data will be good for the USD and bad for risk markets, owing to the impact on the tapering process. Accordingly, we still like USD dip-buying into the early parts of the summer.” Producer price inflation data on Friday is this week’s U.S. economic focus, with consumer spending numbers also due that day, and the latest reading on jobless claims released on Thursday.
The yen weakened as far as 111.11 per dollar for the first time in 15 months on Thursday, and was last mostly flat at 111.03. The euro was little changed at $1.19220 compared to the previous session, when it rose as high as $1.19700 for the first time in a week. It had dipped to the lowest since April 6 on Friday, at $1.18470. “Going forward, the dollar could continue to strengthen against some of the lower yielding G-10 currencies, where the central banks are likely to lag the Fed in terms of tightening,” said Shinichiro Kadota, a currency strategist at Barclays in Tokyo. Kadota projected the yen will fall to 112 per dollar and the euro to $1.18 by year-end. “Risks to the dollar are slightly more to the upside now.”
South African Rand
Reuters: South Africa's rand firmed on Wednesday as the dollar retreated after U.S. Federal Reserve Chairman Jerome Powell calmed concerns over policy tightening, while markets also digested data showing a surge in domestic inflation. At 1505 GMT, the rand traded at 14.1925 against the dollar, 0.54% stronger than its previous close. The rand came under pressure after the Fed surprised markets on June 16 by saying that policymakers are forecasting two interest rate hikes in 2023. But Powell on Tuesday said that prices are rising due to a "perfect storm" of rising demand for goods and services and bottlenecks in supplying them as the economy reopens from the pandemic and that those price pressures should ease on their own.
Riskier currencies, such as the rand, thrive on U.S. interest rates remaining low because they benefit from the interest rate differential that increases their appeal for carry trade. Data on Wednesday showed South Africa's headline inflation in May soared to a 30-month high of 5.2%, as expected but above the mid-point of the central bank's target range of 3% to 6%. Despite building price pressures, economists are not predicting the South African Reserve Bank (SARB) will raise rates when it next meets in July. "The SARB has been clear – by normalising early, they might be best placed to support the economy recovery. The more front-loaded any rate tightening, the lower the scale of the tightening that will be needed to deliver price stability," "That said, we do not see any rate hikes in 2021, and currently forecast second half 2022 for normalisation to commence."
Stocks on the Johannesburg Stock Exchange (JSE) regained some of their strength after hopeful signals from the U.S. Fed that it will not be as hawkish as investors had thought last week. Stocks locally were also boosted by strong commodity prices on the back of a stronger rand and driven by global demand. The benchmark all-share index .JALSH closed up 0.41% to 65,820 points while the blue-chip top-40 companies' index ended up 0.45% at 59,764 points. The local mining firms led the rally with the mining index closing up 1.73% followed by the bank index which was up by 0.7% on Wednesday.
Reuters: Asian shares marked time on Thursday, with China nudging lower, while the U.S. dollar held below an 11-week high as investors reassessed U.S. Federal Reserve statements on inflation and looked to upcoming data for direction. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1% to 695.2 points, off a one-month trough of 685.12 touched earlier this week. Japan’s Nikkei rose slightly to 28,905.5, while Chinese shares were in the red with the blue-chip CSI300 index off 0.3%.
On Wall Street, the Nasdaq closed at a record high on Wednesday, while other major U.S. indexes ended lower alongside European stocks. The market has whipsawed over the last week, feeling the after-effects of a surprise projection for rate increases as soon as 2023 by the U.S. Federal Reserve which knocked stocks, boosted the dollar and led to the flattening of the U.S. bond yield curve. Investors are now pricing the first full U.S. interest rate rise for February 2023 compared to December 2022 in the immediate aftermath of the Fed meeting. Overnight, 10-year Treasury yields remained below 1.5% in muted trading. “Until bond yields break out in a sustainable fashion, in either direction, it remains very hard to determine which direction stocks are headed in over the near term,” JPMorgan analysts wrote in a note. “Much continues to hinge on the upcoming growth data.”
Europe released strong manufacturing activity data on Wednesday, while figures on ISM manufacturing and U.S. non-farm payrolls are due next week. The U.S. dollar vacillated below an 11-week high versus major peers as traders navigated conflicting signals from Fed officials on the timing of a withdrawal of monetary stimulus. On Wednesday, two Fed officials said a period of high inflation in the United States could last longer than anticipated, just a day after Fed Chair Jerome Powell played down rising price pressures. The dollar index, which measures the greenback against six rivals, stood at 91.806 early in the Asian session after dipping to 91.509 on Wednesday. It was at 92.408 at the end of last week, the highest since April 9.
Against the Japanese yen, the dollar climbed to a 15-month high of 111.11. The Bank of England is expected to acknowledge the strength of inflationary pressures in recent data when it meets later in the day. “We do not expect the statement to push back against expectations that interest rates could start to move higher in the second half of next year,” ANZ economists said. The British pound was steady at $1.3959. Flash U.S. manufacturing PMI climbed to a record high in June, but manufacturers are still struggling to secure raw materials and qualified workers, substantially raising prices for both businesses and consumers. Early PMI data showed that euro zone business growth accelerated at its fastest pace in 15 years in June on the easing of more lockdown measures and the unleashing of pent-up demand.
Oil prices hovered near two years high after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America. Brent crude futures was last off 5 cents at $75.14 a barrel and U.S. crude eased 5 cents to $73.03 per barrel. Spot gold prices dipped to $1,776 an ounce.