Reuters: The pound held steady on Thursday, and was heading for its biggest monthly gain versus the dollar since November, as an apparent abatement in concern among investors over the banking sector drove flows away from the U.S. currency.
British Pound
Sterling has risen by nearly 3% against the dollar in March and is hovering around eight-week highs. Data this week showed UK grocery inflation hit a record high of 17.5% in March. Temporary shortages of certain food items, such as salad ingredients, helped drive the rise. But overall, at more than 10%, headline inflation in Britain is showing no signs of slowing down.
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Sterling was last up 0.4% against the dollar at $1.2361 and up 0.1% against the euro at 87.97 pence. The pound is heading for its largest monthly gain since a 5.2% rally in November. Against the euro, it has been a lot more measured, having barely moved month on month. “In a similar situation to the euro, the pound is being supported by central bank divergence. The Fed appears less certain about its next step even after the banking sector turmoil seems to have been contained,” City Index strategist Fiona Cincotta said. “Meanwhile, BoE Governor Andrew Bailey has said that the central bank may need to hike rates again after UK inflation unexpectedly rose to 10.4% in February and food inflation rose to a record high in March,” she said. A report from the BoE on Wednesday showed the volume of mortgages approved by British lenders rose more than expected in February, which suggests the housing market downturn may be levelling off.
Expectations for what the BoE is likely to do this year in terms of monetary policy have changed drastically in March. At the start of the month, markets were factoring in the probability that UK rates would peak close to 5% by the end of this year – which at that point, meant another 75 basis points in rate rises. Four weeks on and money markets show traders now think rates will top out at 4.5% by September – meaning they believe the BoE has one more quarter-point rise up its sleeve, at most. Even with this loosening of expectations, the pound has gained ground against the dollar. The strength in sterling is less about anticipated rate differentials and more about investors releasing their grip on typical safe-haven assets like the dollar, as the acute concerns about the stability of the banking sector have ebbed.
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The difference between the yield on 10-year gilts and 10-year U.S. Treasuries is set to rise for the first month since September in March, which gives the pound something of an edge. Also, daily sterling charts show the technical picture is generally favourable. “For the moment, the price remains above the 50-day simple moving average, and as long as this remains the case, then the bullish view continues to hold sway, and we expect additional upside above the January highs in due course,” IG strategist Chris Beauchamp said.
US Dollar
Reuters: Asian shares were headed for a second quarterly gain on Friday while bonds were enjoying the best month since 2008, but the market was braced for a stormy session after an upside surprise in German CPI raised the stakes for U.S. inflation data. Also making headlines on Friday, Donald Trump was indicted after a probe into hush money paid to porn star Stormy Daniels, becoming the first former U.S. president to face criminal charges even as he makes another run for the White House. MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1% on Friday, heading for its first March gain in four years with a rise of 2.9%, as fears of a global banking crisis receded. It is up 4% for the quarter, after surging 12% in the three months ending December.
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Japan’s Nikkei also gained 1%，as inflation data for the capital city Tokyo highlighted broadening price pressures. China’s bluechips rose 0.3% and Hong Kong’s Hang Seng Index leaped 1.5%, after China’s PMI data showed the recovery in the services sector is gathering pace and manufacturing activity expanded at faster than expected. Investors cheered a major revamp plan by Alibaba Group , taking it as a signal that Beijing’s regulatory crackdown on technology corporates is ending. Alibaba’s shares jumped 4.4% on Friday, bringing its monthly gain to 17%. Overnight, Wall Street was boosted by gains in technology-related shares, although regional bank shares fell after Treasury Secretary Janet Yellen said banking regulation and supervisory rules need to be re-examined. The Dow Jones rose 0.4%, the S&P 500 gained 0.6% and the Nasdaq Composite added 0.7%.
Markets are shifting their focus back to the inflation vigil and the outlook for interest rate hikes on hopes that the recent bank turmoil has been largely contained. A slower than expected decline in German inflation has raised the stakes for U.S. personal consumption expenditures (PCE) inflation, tracked by the Federal Reserve for monetary policy, later in the day. Economists are expecting the PCE index to ease to 0.4% in February from January when it rose 0.6%. However, there is still an expectation that banks will tighten lending following the troubles at three regional U.S. banks and the Credit Suisse takeover, so central banks do not have to hike more. “The strongest headwind for the global economy has shifted from an energy crisis and the related squeeze on real incomes to a potential banking crisis and associated drag on credit,” said analysts at Capital Economics.
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“With central banks still mindful of inflation risks, interest rates will stay at their peaks for several months. But when they come, cuts will be more aggressive than is typically assumed.” Fed funds futures are still split on whether the Federal Reserve will hike or not at the next policy meeting in May, while pricing in a rate cut by Novemeber. That compared with an overwhelming bet on a 25 basis point hike a month ago before the banking volatility started. Overnight, three Fed officials kept the door open to more rate rises, although two of them noted that banking sector problems could generate enough headwinds on the economy to help cool price pressures faster than expected. U.S. Treasuries had a blockbuster month, with the two-year yields down a whopping 68 basis points to 4.1113%, the biggest monthly decline since early 2008. Ten-year yields were 36 bps lower this month to 3.5563%.
The U.S. dollar fell 2.6% against its peers so far in March, with the euro surging 3% to $1.0903 and the yen gaining 2.2% to 133.3 per dollar amid the safe-haven flows into the Japanese currency. Oil prices were a touch higher on Friday, but were still down more than 3% for the month. U.S. crude futures edged up to $74.42 per barrel, while Brent crude futures rose 0.2% to $79.42 per barrel. Gold was slightly lower but is up 8.3% for the month. Spot gold was traded at $1,978.49 per ounce, highest since April last year.
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South African Rand
Reuters: South Africa’s rand strengthened against the dollar on Thursday after the central bank raised its main interest rate by a higher than forecast 50 basis points to 7.75%. At 13:44 GMT, the rand traded at 17.8000 against the dollar, 1.78% stronger than its previous close. A majority of economists polled by Reuters had expected the South African Reserve Bank to announce a 25 basis point increase. “Recent polls showed the vast majority of economists were predicting a 25 bps increase, with an outside expectation of no change,” said Rand Swiss Portfolio Manager Gary Booysen.
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On the Johannesburg Stock Exchange, the blue-chip Top 40 index was last down 0.03% higher, while the broader all-share index fell 0.04%. Statistics South Africa data showed last week that February inflation rose to 7.0% year on year from 6.9% in January, remaining above the bank’s target of between 3% and 6%. The government’s benchmark 2030 bond was stronger, with the yield down 5 basis points to 9.865%.
Global Markets
Reuters: Asian shares were headed for a second quarterly gain on Friday while bonds were enjoying the best month since 2008, but the market was braced for a stormy session after an upside surprise in German CPI raised the stakes for U.S. inflation data. Also making headlines on Friday, Donald Trump was indicted after a probe into hush money paid to porn star Stormy Daniels, becoming the first former U.S. president to face criminal charges even as he makes another run for the White House. MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1% on Friday, heading for its first March gain in four years with a rise of 2.9%, as fears of a global banking crisis receded. It is up 4% for the quarter, after surging 12% in the three months ending December.
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Japan’s Nikkei also gained 1%，as inflation data for the capital city Tokyo highlighted broadening price pressures. China’s bluechips rose 0.3% and Hong Kong’s Hang Seng Index leaped 1.5%, after China’s PMI data showed the recovery in the services sector is gathering pace and manufacturing activity expanded at faster than expected. Investors cheered a major revamp plan by Alibaba Group , taking it as a signal that Beijing’s regulatory crackdown on technology corporates is ending. Alibaba’s shares jumped 4.4% on Friday, bringing its monthly gain to 17%. Overnight, Wall Street was boosted by gains in technology-related shares, although regional bank shares fell after Treasury Secretary Janet Yellen said banking regulation and supervisory rules need to be re-examined. The Dow Jones rose 0.4%, the S&P 500 gained 0.6% and the Nasdaq Composite added 0.7%.
Markets are shifting their focus back to the inflation vigil and the outlook for interest rate hikes on hopes that the recent bank turmoil has been largely contained. A slower than expected decline in German inflation has raised the stakes for U.S. personal consumption expenditures (PCE) inflation, tracked by the Federal Reserve for monetary policy, later in the day. Economists are expecting the PCE index to ease to 0.4% in February from January when it rose 0.6%. However, there is still an expectation that banks will tighten lending following the troubles at three regional U.S. banks and the Credit Suisse takeover, so central banks do not have to hike more. “The strongest headwind for the global economy has shifted from an energy crisis and the related squeeze on real incomes to a potential banking crisis and associated drag on credit,” said analysts at Capital Economics.
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“With central banks still mindful of inflation risks, interest rates will stay at their peaks for several months. But when they come, cuts will be more aggressive than is typically assumed.” Fed funds futures are still split on whether the Federal Reserve will hike or not at the next policy meeting in May, while pricing in a rate cut by Novemeber. That compared with an overwhelming bet on a 25 basis point hike a month ago before the banking volatility started. Overnight, three Fed officials kept the door open to more rate rises, although two of them noted that banking sector problems could generate enough headwinds on the economy to help cool price pressures faster than expected. U.S. Treasuries had a blockbuster month, with the two-year yields down a whopping 68 basis points to 4.1113%, the biggest monthly decline since early 2008. Ten-year yields were 36 bps lower this month to 3.5563%.
The U.S. dollar fell 2.6% against its peers so far in March, with the euro surging 3% to $1.0903 and the yen gaining 2.2% to 133.3 per dollar amid the safe-haven flows into the Japanese currency. Oil prices were a touch higher on Friday, but were still down more than 3% for the month. U.S. crude futures edged up to $74.42 per barrel, while Brent crude futures rose 0.2% to $79.42 per barrel. Gold was slightly lower but is up 8.3% for the month. Spot gold was traded at $1,978.49 per ounce, highest since April last year.
Published by the Mercury Team on 31 March 2023
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