Forex
Dollar steady ahead of key job data; yuan weathers China outlook cut
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© Reuters. U.S. Dollar and Chinese Yuan banknotes are seen in this illustration picture taken June 14, 2022. REUTERS/Florence Lo/Illustration/File Photo
By Amanda Cooper
LONDON (Reuters) -The U.S. dollar stood near a one-week high against a basket of currencies on Tuesday, ahead of a flurry of employment data that could upend investor expectations for the interest rate outlook.
The yuan held steady in the face of a downgrade to the outlook for China’s credit rating from Moody’s (NYSE:), as major state-owned banks stepped in to stem any slide by selling dollars.
The euro took a modest early knock from comments by European Central Bank member Isabel Schnabel, who said in an interview with Reuters that interest rate hikes were off the table, given the recent “remarkable” fall in inflation.
held close to its highest since April last year, near $42,000, as a decline in the dollar in recent weeks has diverted cash into riskier assets.
Investors are keenly awaiting Friday’s U.S. non-farm payrolls report for November. But before then, the monthly JOLTS report – which captures monthly hirings and firings – lands on Tuesday and the private-sector ADP survey is due on Wednesday.
Both could shape expectations for Friday’s number and make for volatile trading in the run-up, given the power of monetary policy expectations to drive currencies right now.
“The market’s main focus now is still very much on what central banks are going to do next year in terms of policy. We’ve had this very dramatic dovish repricing of rate expectations for both the Fed and the ECB over the past week, so that’s certainly having an impact on FX markets,” MUFG currency strategist Lee Hardman said.
The was up 0.15%, around one-week highs.
Analysts said the dollar’s nudge up was in part due to a reversal of the heavy selloff in recent weeks that stripped 3% off the dollar index in November alone, its steepest monthly decline in a year.
CUTS PRICED IN
Traders have priced in at least 125 basis points worth of rate cuts from the Federal Reserve next year, with a good chance of 50 bps by June, according to CME’s FedWatch tool.
“The Fed will be reactive to the hard data and not anticipatory of it,” said Thierry Wizman, Macquarie’s global foreign exchange and interest rates strategist. “So as long as the activity data deteriorates and inflation retreats, convergence toward lower yields will resume.”
By comparison, futures show there is an 82% chance the ECB could deliver its first rate cut by next March. Inflation across the euro zone has fallen more quickly than most anticipated, as evidenced by last Thursday’s consumer price data.
The euro has lost 1.34% since then and the data was enough to persuade ECB board member Schnabel to change her stance on rate cuts. A month ago, she had insisted hikes must remain an option.
The euro was last down 0.1% at $1.082 and down 0.1% against the pound at 85.72 pence.
The yuan held steady after Moody’s decision to cut China’s credit outlook to “negative” on Tuesday, thanks in part to state-owned banks that were seen swapping yuan for U.S. dollars in the onshore swap market and selling those dollars in the spot market, two sources with knowledge of the matter said.
The was broadly steady at 7.154 per dollar, having traded at 7.16 earlier on.
Sterling was little changed at $1.2624, while the yen was steady, leaving the dollar at 147.11.
The Australian dollar fell 0.9% to $0.6558, below Monday’s four-month high, after the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35% on Tuesday, as widely expected, and noted that economic data received since November had been broadly in line with forecasts.
In cryptocurrencies, bitcoin was down 0.5% at $41,777, narrowly below Monday’s peak of $42,404, its highest since April 2022.
The world’s largest cryptocurrency has gained 150% this year, fuelled in part by optimism that U.S. regulators will soon approve exchange-traded spot bitcoin funds (ETFs), which could open the bitcoin market to millions more investors.
“$40,000 has acted like a magnet since bitcoin finally broke through $30,000 in late October,” said crypto-services firm Nexo co-founder Antoni Trenchev. “It was only a matter of time before the next round number succumbed as enthusiasm about a spot ETF reaches fever pitch.”
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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