US Dollar pauses bullish run: Aussie jumps after RBA rate decision

Reuters: The US Dollar pauses bullish run on Tuesday from its rally at the start of the week, but hovered near a one-month peak as traders raised their forecasts of U.S. Federal Reserve interest rate levels needed to tame inflation.

US Dollar pauses bullish run

The Australian dollar, meanwhile, surged in the aftermath of the Reserve Bank of Australia’s (RBA) interest rate decision, rising as much as 1% to an intra-day high of $0.6952. The RBA on Tuesday raised its cash rate by an expected 25 basis points, and signalled further rate hikes ahead. Wrapping up its February policy meeting, the RBA said core inflation had been higher than expected and higher rates would be needed to ensure that inflation returns to its target of 2%-3%. Elsewhere, markets were recovering from the shock of Friday’s jobs report in the United States, which showed that non-farm payrolls surged by an eye-watering 517,000 in January, pointing to a stubbornly resilient labour market. The report, which wrongfooted traders banking on an imminent pause in the Fed’s rate-hiking cycle, gave the U.S. currency a leg up in previous sessions, though it gave back some of those gains in Asia trade on Tuesday.

Sterling was last 0.27% higher at $1.2054, after tumbling to a one-month low of $1.2006 in the previous session. Similarly, the kiwi rose 0.29% to $0.6323, but was not far from Monday’s one-month trough of $0.6271. The euro gained 0.12% to $1.0739, having slid to $1.0709 in the previous session, the lowest since Jan. 9. “Since last Friday, (when) the U.S. reported a stronger than expected jobs number, this has reversed expectations that the Fed would pivot in its monetary policy,” said Tina Teng, market analyst at CMC Markets. “I don’t think the jobs number is key … but it’s definitely a major impact on (the Fed’s) monetary policy.” U.S. Treasury yields have risen on the back of higher rate expectations, with two-year yields touching a one-month high of 4.4930% on Monday. Two-year yields last stood at 4.4243%. The benchmark 10-year yields were last at 3.6193%, having similarly climbed to a four-week peak of 3.6550% in the previous session.

Futures pricing show that markets are expecting the Fed funds rate to peak just above 5.1% by June, compared with expectations of less than 5% prior to Friday’s jobs report. The surging U.S. currency pushed the U.S. dollar index to a near one-month high of 103.76 on Monday, and it was last 0.15% lower at 103.45. Elsewhere in Asia, the Japanese yen rose 0.3% to 132.24 per dollar, but remained pinned near Monday’s one-month low of 132.90 per dollar. Data on Tuesday showed that Japan’s real wages rose in December for the first time in nine months, though uncertainty remains over whether pay hikes will continue to sustain the country’s economic recovery. A newspaper report on Monday said that Japan’s government has sounded out Bank of Japan (BOJ) Deputy Governor Masayoshi Amamiya to succeed incumbent Haruhiko Kuroda as central bank governor. Amamiya is considered by markets as more dovish than other contenders. “I don’t think the BOJ will reverse monetary policy,” said CMC’s Teng, on market hopes the central bank will abandon its yield curve control policy once a new governor takes office. “There are still economic concerns, there are still recessionary risks.”

British Pound

Reuters: Sterling hit a one-month low against the dollar on Monday, at the start of a week where traders are focussing on British growth data and remarks from Bank of England policy makers about the pace of interest rate hikes. The pound weakened 0.2% to trade at $1.2031, extending declines after losing 2.8% against the greenback last week – its worst such decline in more than four months – when blowout U.S. jobs data sent the greenback higher against almost all currencies. Against a weaker euro, the British currency edged up, but stayed close to its softest against the single currency since late September. “Growth data and BoE speakers will be the two domestic inputs for the pound this week, although global risk sentiment, geopolitical developments and a supported dollar may work against any positive domestic news,” said Francesco Pesole, FX strategists at ING.

British economic growth numbers will be released on Friday and are expected to show the economy likely avoided a second straight quarter of contraction – a commonly used definition of a recession. Risk sentiment globally was weak as investors unwound positions that central banks may pause interest rate hikes soon. Trader expectation for a 25 basis points hike from the Federal Reserve rose 95% after Friday’s jobs data. On the geopolitical front, the U.S. military said on Sunday it was searching for remnants of the suspected Chinese surveillance balloon it shot down a day earlier, deepening worries about strained ties between the world’s two largest economies. Closer to home, BoE rate-setter Catherine Mann on Monday backed further increases in interest rates and warned that pausing, as some of her colleagues advocate, risked a confusing “policy boogie”.

The central bank last week dropped its pledge to “respond forcefully” to signs of further inflationary pressure, adding that inflation had probably peaked, alongside a 50 basis point rate increase. “We have argued that this policy stance puts more pressure on the currency,” said FX strategists at Goldman Sachs in a note. Comments from Huw Pill, regarded as a centrist figure on the monetary policy committee, are due this week and Governor Andrew Bailey will also testify before Parliament.

South African Rand

Reuters: South Africa’s rand weakened on Monday, as the U.S. dollar jumped on expectations that the U.S. Federal Reserve might pursue its inflation-fighting interest rate hikes for longer. At 15:50 GMT, the rand traded at 17.6975 against the dollar, 1.24% weaker than its previous close. The dollar was last up 0.55% at 103.700 against a basket of currencies riding on a blockbuster U.S. jobs report last Friday. In the absence of major local economic developments, the risk-sensitive rand often takes cues from global drivers. The markets will keep a close eye on the Investing in African Mining Indaba conference this week, which is bringing together mining company executives, investors, and mines ministers from across Africa and beyond to discuss industry issues and to network.

The focus will also be on President Cyril Ramaphosa’s annual State of the Nation Address in parliament on Thursday and a possible cabinet reshuffle. Shares on the Johannesburg Stock Exchange followed similar moves as global equities and ended lower, with both the broader all-share index and the top-40 index ending about 0.8% down.

The government’s benchmark 2030 bond was weaker in early deals, with the yield up 11.5 basis points at 9.700%.

World Markets

Reuters: Asian share markets stabilised somewhat on Tuesday after steep losses in the past 24 hours, while the U.S dollar remained elevated as investors considered the prospects interest rates would remain higher for longer in many developed economies. MSCI’s broadest index of Asia-Pacific shares outside Japan bounced slightly 0.4%, after U.S. stocks ended the previous session with mild losses. The index is up 0.8% so far this month. Australia’s S&P/ASX200 was up 0.13% and Japan’s Nikkei stock index rose 0.26%. Hong Kong’s Hang Seng Index opened up 0.68% and China’s bluechip CSI300 Index was 0.3% higher in early trade. The Reserve Bank of Australia (RBA) is expected to extend its monetary tightening campaign when it meets later in the day. The central bank is likely to lift the official cash rate by another 25 basis points to 3.35%, according to economists polled by Reuters. The decision will be announced at 03:30 GMT. “Sentiment in markets is dominated by central banks and the repricing of rates yet again,” Kerry Craig, JPMorgan Asset Management’s global market strategist, told Reuters.

“Equities have had a strong run since the start of the year so seeing an air pocket emerge now is no major surprise. “It’s a quiet week for economic data globally and when that is the case uncertainty over interest rates is the dominant theme among investors.” In the Asian trading session, the yield on benchmark 10-year Treasury notes hit 3.6268% compared with its U.S. close of 3.632% on Monday. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, touched 4.4368% compared with a U.S. close of 4.456%. The repricing of higher rates began after strong U.S jobs growth in January, with employment rising 517,000, more than double economists expectations. The unemployment rate hit 3.4%, the lowest in more than 53 years. Investors will be closely watching a speech by Federal Reserve Chairman Jerome Powell at the Economic Club of Washington later on Tuesday.

Overnight on Wall Street, the Dow Jones Industrial Average fell 0.1%, the S&P 500 lost 0.61% and the Nasdaq Composite dropped 1%. “The market has repriced to expect that the Fed Funds rate will peak just above 5% and it now only anticipates very limited rate cuts, just one of 25 basis points by the end of this year,” ANZ economists wrote. “It’s very clear that sentiment is fragile and data dependent, and this new defensive posture may have further to run near term as risk positions are scaled back.” The dollar eased 0.04% against the yen to 132.6, after touching a three-week high of 132.9 during the U.S trading session. The European single currency was up 0.1% on the day at $1.0736, having lost 1.16% in a month. The dollar index, which tracks the greenback against a basket of major trading partner currencies, was down marginally at 103.47 from its U.S. trading levels. However, it remains well above its recent low of 101.55 on Feb 3. U.S. crude ticked up 0.9% to $74.78 a barrel. Brent crude rose to $81.69 per barrel. Gold was slightly higher. Spot gold was traded at $1871.65 per ounce.

Published by the Mercury Team on 7 February 2023

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