Dollar sank versus Yen with US yields depressed after CPI

Reuters: The US Dollar sank for a second day against the yen on Thursday, feeling the pressure from lower U.S. Treasury yields after slowing inflation gave traders more confidence that the Federal Reserve is through with rate hikes.

US Dollar sank again

The 10-year Treasury yield, which the dollar-yen pair tends to track, slipped to 3.4252% in Tokyo trading, extending an 8 basis point decline from overnight, after headline CPI printed below 5% for the first time in two years. The U.S. currency fell 0.26% to trade at 134.025 yen in the Asian morning, and earlier dipped as low as 133.895. The dollar index – which measures the greenback against a basket of six major peers, including the yen – edged 0.05% lower to 101.36. “Yesterday’s CPI was a bit of a relief, and we do expect that the Fed is now finished hiking,” said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo. “That’ll weigh on dollar-yen,” with the pair potentially weakening to as low as 130 in the near term, Kadota said.

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Money market traders currently lay only 5% odds on a quarter point hike in June, and a 95% probability of a pause. Three quarter point cuts are priced by the end of this year. Bank of Japan policymakers, meanwhile, saw the country making progress towards sustainably hitting their inflation target, according to minutes from their April meeting. But they also agreed on the need to maintain ultra-easy stimulus setting amid uncertainty about the sustainability of wage growth as well as the global economic outlook. “They’re still trying to balance the overall tone,” said Kadota.The euro inched 0.05% higher to $1.09885, moving back the middle of its trading range over the past month.

Sterling nosed up 0.04% to $1.2631, edging back toward Wednesday’s one-year high of $1.2679. The Bank of England releases its policy decision later on Thursday, and is poised for a 12th straight rate hike. Elsewhere, the Aussie dollar rose 0.08% to $0.6784, pushing back toward Wednesday’s 2-1/2-month high of $0.6818. New Zealand’s kiwi dollar added 0.09% to $0.63735, after touching a nearly three-month high of $0.6384. Earlier gains cooled after data from China – a key trading partner – showed consumer prices rising at a slower pace, giving further evidence of tepid domestic demand. Leading cryptocurrency bitcoin was little changed at around $27,562, after dipping as low as $26,842 overnight for the first time since March.

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British Pound

Reuters: The pound rose to a five-month high against the euro on Wednesday as traders bet a rate hike from the Bank of England on Thursday will not be the last. The euro fell to 86.73 pence earlier in the session, the lowest since Dec. 15. It was last little changed at 86.84 pence. Against the dollar, the pound was last down very slightly at $1.262, just below the one-year high of $1.267 reached on Monday. Sterling has rallied around 22% since tumbling to a record low of $1.0327 in September, including a 4.6% rally this year. It remains around 17% below its level 10 years ago, however. A better-than-expected – although still lacklustre – economic performance has supported sterling, as has a relatively sharp fall in the dollar as U.S. inflation has cooled.

Expectations that the Bank of England will have to keep raising interest rates to bring down stubborn inflation have also boosted the pound. The BoE is expected to hike rates by 25 basis points today to 4.5%, the highest level since 2008. Pricing in derivatives markets shows that traders expect rates to peak at more than 4.8% in September. Investment banks have become more upbeat about the pound in recent weeks as the currency has rallied. Barclays analysts told clients on Sunday that “another hike from the BoE should be supportive for GBP”.

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Goldman Sachs on Friday said it was now “constructive” on the pound. “We think that the same factors that acted as headwinds on Sterling in 2022 – mostly natural gas prices and the relative stance of BoE policy – have turned to tailwinds,” its analysts wrote. However, Deutsche Bank strategist Shreyas Gopal took a contrary view in a note on Wednesday, saying the rally had likely run out of steam. “Having been bullish on the pound since the start of the year, we no longer think the pound presents attractive risk-reward in the short term,” Gopal wrote.

South Africa Rand

Reuters: The South African rand plunged to a three-year low on Wednesday after a steep drop in the previous day, while international and domestic government bonds also fell, as fears grew of scheduled blackouts known as loadshedding worsening during winter. At 0830 GMT, the rand was trading at 18.785 against the U.S. dollar, after hitting its weakest level since early May 2020 at 18.8325 earlier in the day. On Tuesday, the rand had fallen 1.7%. South Africa’s sovereign dollar bonds dropped, with longer dated maturities falling the most. The 2052 maturity fell more than 1 cent to 82.4 cents in the dollar. The yield rose above 9%, its highest level in almost six months. South Africa’s struggling state utility Eskom told parliament on Tuesday that there would be a 45-day delay in returning a generating unit online, according to local media.

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The delay is likely to add further pressure on the grid during winter, when loadshedding across most parts of the country is already more than 10 hours a day. “SA bonds and the ZAR are underperforming their EM counterparts this morning,” Kieran Siney of ETM Analytics said in emailed comments. “Until there is a concrete plan to resolve SA’s energy crisis that the market buys into, the underperformance will persist, notwithstanding the attractive yields on offer and deep undervaluation in the ZAR.” The government’s local bonds also dropped, with yields on the benchmark 2030 bond rising 17 basis points to 10.5%, the highest level since December.

ETM Analytics said in a separate note on Wednesday morning that misleading headlines on Tuesday had sparked the market rout by giving “the impression that was losing control of the grid”. “SA is in trouble, the grid is under pressure, Eskom does face multiple threats, but none of this is anything new,” it said. The rand is also sensitive to global risks and caution has been mounting ahead of Wednesday’s U.S. Consumer Price Inflation print scheduled for 1230 GMT.

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Global Markets

Reuters: Asian shares rose on Thursday as investors cheered signs of easing inflationary pressure in the U.S. after data showed consumer prices in April rose at a slower-than-expected pace. The Labor Department’s Consumer Price Index rose 4.9% in April from a year ago, compared with expectations of a 5% increase, raising hopes that the Federal Reserve’s interest rate hiking cycle is close to an end. Month-over-month CPI in April rose 0.4% after gaining 0.1% in March. “Should the data stay strong again in May there is every likelihood the FOMC will have to revise up its GDP and inflation projections and take down its unemployment forecast of 4.5% for Q4 this year. That could have significant implications for the dot plot,” ANZ analysts said in a note. Markets are also watching out for China’s consumer and producer price growth data and Japan’s full-year earnings season which rolls on with Honda, Nissan and SoftBank Group among the companies reporting.

China’s consumer prices rose at a slower pace and missed expectations in April, while factory gate deflation deepened, data showed on Thursday, suggesting more stimulus may be needed to boost a patchy post-COVID economic recovery. Group of Seven finance leaders on Thursday open three days of meetings in Japan and will seek to diversify supply chains away from China – but also try to get Beijing’s cooperation in solving global debt problems. Early in the Asian day, MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.4%. Australian shares were down 0.19%, while Japan’s Nikkei stock index slid 0.13%. China’s blue-chip index edged up 0.15% in early trade, while Hong Kong’s Hang Seng index opened 0.41% higher.

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A gauge of global stock markets rose and bond yields slid on Wednesday after data showed U.S. consumer prices in April rose at a slightly slower-than-expected pace, suggesting the Federal Reserve is succeeding in taming high inflation. The Nasdaq ended Wednesday at its highest intraday level in more than eight months, boosted by the lower-than-expected increase in April inflation and Alphabet Inc’s latest artificial intelligence rollout. The Nasdaq Composite added 1.04% while the Dow Jones Industrial Average fell 0.09% and the S&P 500 gained 0.45%. The two-year Treasury yield, which typically moves in step with rate expectations, touched 3.9222% compared with a U.S. close of 3.901%. The yield on benchmark 10-year Treasury notes reached 3.4326% compared with its U.S. close of 3.436% on Wednesday.

The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, edged 0.01% lower to 101.4. The Japanese yen held to gains and was last seen at 134.070. The European single currency was up 0.1% on the day at $1.0989, having lost 0.28% in a month. Oil prices rose in early Asian trade after strong demand for fuels in the U.S. outweighed concerns about the possibility of the world’s biggest oil producer and consumer defaulting on its debt. U.S. crude ticked up 0.54% to $72.95 a barrel. Brent crude rose to $76.81 per barrel. Gold was slightly higher. Spot gold was traded at $2034.43 per ounce.

Published by the Mercury Team on 11 May 2023

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