By Arnaud Masset, market analyst at Swissquote Bank
- USD struggling to gain positive momentum over the last month and now further losses cannot be ruled out as the world’s biggest economy tries to convince the markets that everything is fine
- A weak USD will allow riskier currencies to continue appreciating although central banks across the globe still have some fire power and are determined to prevent further appreciation of their local currencies
- NZ: Given recent USD weakness, the RBNZ will have to release an extremely dovish statement in addition to a rate cut if Governor Wheeler hopes to bring the Kiwi to more competitive levels
- Ahead of tonight’s interest rate decision, the risk is definitely on the upside for the Kiwi as a very dovish statement will be required to prevent the Kiwi from resuming its rally
- The cable is heading lower, towards 1.3000 and will continue to head south
The US dollar lost ground against all major peers on Wednesday as US treasury yields dropped amid fading expectations for a Fed rate hike. In the wake of the strong NFP report, the probability of a rate hike in September – extracted from the Fed fund futures – currently stands at (only) 26%, while the probability of a move before year-end flirts with the 50% threshold, suggesting that the market is giving up the idea of tightening in 2016. The monetary policy sensitive 2-year treasury yields slid to 0.6980%, down 4bps compared to post-NFPs levels. Consequently, the greenback was trading lower across the board, losing as much as 0.60% against the New Zealand dollar and 0.55% against the Japanese yen. The dollar index was down 0.40% overnight, completely reversing the gains made on the back of last Friday’s strong NFPs. The USD has been struggling to gain positive momentum over the last month and now it seems that further losses cannot be ruled out as the world’s biggest economy is struggling to convince markets that everything is fine. The weak USD will allow riskier currencies to continue appreciating; however central banks across the globe still have some fire power left and are determined to prevent further appreciation of their local currency. Competitiveness first!
The New Zealand dollar accelerated in overnight trading reaching 0.7228 against the US dollar in spite of an expected upcoming rate cut by the RBNZ no later than tomorrow morning. Given the recent USD weakness, the RBNZ will have to release, in addition to a rate cut an extremely dovish statement if Governor Wheeler wants to bring the Kiwi to levels considered as competitive by the RBNZ. Since Monday, the Kiwi has risen as much as 2% against the greenback, completely erasing the losses made on the back of the US jobs report. Ahead of tonight’s interest rate decision, the risk is definitely on the upside for the Kiwi as a very dovish statement will be required to prevent the Kiwi to resume its rally. NZD/USD moved back below the 0.7182 resistance implied by the 61.8% Fibonacci line on July debasement.
YannQuelenn, market analyst: “Sterling to continue its freefall: The cable is heading lower towards 1.3000 and for the second time since the Brexit vote, this level has been broken. In our view, this freefall will only continue but this is definitely not only due to the Brexit vote. Last week, BoE Governor Mark Carney announced that the rate cut was triggered by the potential downturn implied by the result of the 23rd of June referendum. We found this statement misleading. Essentially, we believe that the BoE is simply trying to save the GDP while it is in a complete free-fall. 2017 GDP forecasts have been slashed to 0.8% from 2.3%.
UK total debt was around CHF 2 trillion at the end of 2015 and servicing this debt costs around 3% of the GDP each year. But in this era of lowering interest rates, and declining growth, the cost of debt is growing, making it increasingly difficult to pay back. This is the real reason why Mark Carney cut the rate and announced the massive expansion of the BoE’s asset-purchase program to 425 billion pounds.
The BoE is just like any other major central bank in that “free money” reigns supreme. The Fed is now the only remaining central bank to announce a rate hike decision, the S&P 500 is at an all-time high but the Fed is afraid to raise rates by 25 basis points. All central banks act together and use the same monetary policy. The Fed is no different.” —
In the equity market, it is a day for profit taking as most equity indices are blinking red across the screen. In Asia, mainland Chinese shares edged lower with the Shanghai and Shenzhen Composites falling 0.20% and 0.13% respectively. In Japan, the Nikkei was down 0.18%, while in Singapore the STI edged up 0.03%. Offshore, Taiwan’s Taiex was up 0.50%, while in Hong Kong’s Hang Seng edged down 0.08%. European equity futures were no exception and followed the Asian lead in negative territory.
Global stocks slide on inflation fears, dollar gains
By Herbert Lash
NEW YORK (Reuters) – The Nasdaq recovered as the bond rout retreated on Friday, but most other equity markets swooned around the world as data showing a strong rebound in U.S. consumer spending kept fears of rising inflation alive.
Shares of Amazon.com Inc, Microsoft Corp and Alphabet Inc edged up after bearing the brunt of this week’s downdraft to help the Nasdaq shake off its worst day in almost four months on Thursday.
The Nasdaq Composite advanced 0.56% while the S&P 500 slipped 0.48% after a late-session surge failed to hold. The Dow Jones Industrial Average fell 1.51%.
U.S. consumer spending rose by the most in seven months in January as low-income households got more pandemic relief money and new COVID-19 infections dropped, setting up the U.S. economy for faster growth ahead.
The benchmark 10-year Treasury note on Thursday shot to a one-year high of 1.614%, a move that rocked world markets. The note’s yield is up more than 50 basis points this year and is now close to the dividend return of S&P 500 stocks.
Yields on the 10-year note fell steadily throughout the session to trade 11.7 basis points lower at 1.3981%.
The amount of money swirling through markets and U.S. stocks at close to all-time highs has caused investor angst, said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.
“Many people are taking some profits and not necessarily reinvesting that money quite yet,” Kinahan said.
“The U.S. equity market is still the best game in terms of safety versus opportunity. But there is a shift going on.”
The scale of the recent Treasury sell-off prompted Australia’s central bank to launch a surprise bond-buying operation to try to stanch the bleeding.
MSCI’s benchmark for global equity markets slid 1.61% to 656.29 despite its large weighting to the U.S. tech heavyweights.
In Europe, the broad FTSEurofirst 300 index closed down 1.64% at 1,559.48. Technology stocks lost the most as they continued to retreat from 20-year highs.
The dollar rose against most major currencies as U.S. government bond yields held near one-year highs and riskier currencies such as the Aussie dollar weakened.
The dollar index rose 0.683%, with the euro down 0.9% to $1.2066. The Japanese yen weakened 0.31% versus the greenback at 106.55 per dollar.
Gold fell more than 2% to an eight-month low, as the stronger dollar and rising Treasury yields hammered bullion and helped it post its worst month since November 2016.
U.S. gold futures settled 2.6% lower at $1,728.80 an ounce.
Benchmark German government bond yields fell for the first time in three sessions but were still headed for their biggest monthly jump in three years after rising inflation expectations triggered a sell-off.
The 10-year German bund note fell 1.2 basis points to -0.271%.
European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.
Copper recoiled after touching successive multi-year peaks in six consecutive sessions, falling more than 3% as risk-off sentiment hit wider financial markets after a spike in bond yields.
Three-month copper on the London Metal Exchange (LME) slumped to $9,112 a tonne.
MSCI’s emerging markets equity index slumped 3.36%, its biggest daily drop since markets plunged in March.
The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.
Currencies favored for leveraged carry trades all suffered, including the Brazil real and Turkish lira, which slid for a fifth straight day, erasing all the year’s gains.
The heaviest selling earlier was in Asia, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since the market rout in late March.
Oil fell. Brent crude futures settled down 75 cents at $66.13 a barrel. U.S. crude futures fell $2.03 to settle at $61.50 a barrel.
(Reporting by Herbert Lash in New York; Additional reporting by Tom Arnold in London, Wayne Cole and Swati Pandey in Sydney; Editing by Nick Zieminski and Matthew Lewis)
Dollar gains on higher yields, risky currencies weaken
By Karen Brettell
NEW YORK (Reuters) – The U.S. dollar gained on Friday as U.S. government bond yields held near one-year highs, while riskier currencies such as the Aussie dollar weakened.
Yields have surged as an acceleration in the pace of vaccinations globally and optimism over improving global growth bolster bets that inflation will rise. That has also led investors to price in earlier monetary tightening than the Federal Reserve and other central banks have signaled.
The dollar move is “a function of what’s happening on the yields side,” said Jeremy Stretch, head of G10 FX strategy at CIBC World Markets. The 10-year yield briefly climbed above the S&P 500 dividend yield on Thursday, he noted, indicating “uncertainty that is writ large.”
The dollar index rose 0.59% to 90.847, its highest level in a week.
It gained against the yen, touching 106.69 for the first time since September.
The benchmark 10-year Treasury yield surged above 1.6% on Thursday for the first time in a year after a weak seven-year note auction. It was last at 1.45%.
U.S. yield increases have accelerated this month as Fed officials refrain from expressing concern about the yield gains.
“The Fed has not really hinted that that’s making them uncomfortable, so the bond market’s going to push that,” said Edward Moya, senior market analyst at OANDA in New York. “That’s really dictating this move in the dollar.”
Riskier currencies retreated. The Aussie fell 1.99% to $0.7713, after topping $0.80 on Thursday for the first time since February of 2018.
Marshall Gittler, head of research at BDSwiss, said the Australian dollar was underperforming despite the market signaling higher growth, likely because the country’s central bank’s yield curve control policy would restrain its bond yields from moving much higher. That, in turn, could limit the attractiveness of the currency.
The greenback is likely to continue to benefit from safe- haven flows if risk appetite continues to worsen, and emerging market currencies may be among the biggest losers.
“There’s a big, big concern that this reflation risk is going to get out of hand and that’s going to really pummel the emerging market currencies, and I think you’re going to see that investors are going to need to reassess their dollar positions,” said Moya.
Data on Friday showed U.S. consumer spending increased by the most in seven months in January, while price pressures were muted.
U.S. jobs data for February released next Friday is the next major economic focus.
Investors are also waiting on details of the U.S. fiscal stimulus bill, which is expected to be passed in the coming weeks.
The Democratic-controlled House of Representatives on Friday was poised to push through President Joe Biden’s $1.9 trillion coronavirus aid package, although it looked unlikely to be able to use the bill to raise the minimum wage nationwide.
The euro dipped 0.79% to $1.2078 after touching a seven-week high of $1.2244 on Thursday.
Bitcoin fell 0.32% to $46,946. Ethereum dropped 0.7% to $1,468.
(Additional reporting by Ritvik Carvalho in London; Editing by Dan Grebler and Andrea Ricci)
Oil drops on dollar strength and OPEC+ supply expectations
By Jessica Resnick-Ault
NEW YORK (Reuters) – Oil prices fell on Friday as the U.S. dollar rose while forecasts called for crude supply to rise in response to prices climbing above pre-pandemic levels.
Brent crude futures for April, which expire on Friday, fell 74 cents, or 1.1%, to $66.14 a barrel by 12:45 EDT (17:45 GMT). The more actively traded May contract slipped by $1.08 to $65.03.
U.S. West Texas Intermediate (WTI) crude futures dropped $1.42, or 2.2%, to $62.11. The contract was still on track to be up 4.8% on the week.
The U.S. dollar rose as U.S. government bond yields held near one-year highs, making dollar-priced oil more expensive for holders of other currencies.
“It’s a dicey time – it doesn’t seem like a time to load up on a risk-asset position,” said Bob Yawger, director of Energy Futures at Mizuho in New York, wary of a potential output increase from OPEC and allies at next week’s meeting. Also, the U.S. stockpile report this week showed a surprise build in oil inventories.
Friday’s gains also reflect profit-taking after both Brent and WTI headed towards monthly gains of about 20% on supply disruptions in the United States and optimism over demand recovery on the back of COVID-19 vaccination programmes.
Investors are betting that next week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+, will result in more supply returning to the market.
U.S. crude production fell in December, the latest month for which data is available, according to a monthly report from the Energy Information Administration.
Despite talk of tightening fundamentals, the demand side of the market is nowhere near warranting current oil price leves, they added.
U.S. crude prices also face pressure from slower refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week.
Refining capacity of about 4 million barrels per day (bpd) remains shut and it could take until March 5 for all capacity to resume, though there is risk of delays, analysts at J.P. Morgan said in a note this week.
(Reporting by Shadia Nasralla, Additional reporting by Sonali Paul in Melbourne and Koustav Samanta in Singapore; Editing by David Goodman, Louise Heavens and David Gregorio)
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