Forex
Euro slumps on political uncertainty; dollar looks to Fed meeting
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Investing.com – The euro slumped Monday, falling to a one-month low, on rising regional political uncertainty, while the U.S. dollar awaits the Federal Reserve’s meeting later in the week.
At 04:0 ET (08:20 GMT), slumped 0.3% to 1.0764, after falling as low at 1.0748 earlier in the session, a one-month low.
Euro slumps on political uncertainty
The single currency slumped Monday after the results from the European Parliament elections, which concluded on Sunday, showed eurosceptic nationalists made the biggest gains.
This prompted French President Emmanuel Macron to call a snap legislative election, taking a gamble to try to reestablish his authority by calling after sharp gains by far-right political rival Marine Le Pen.
“While Marine Le Pen’s National Rally party has shifted away from the anti-euro manifesto it ran on in 2017, fears about shifting support for Ukraine stand to unnerve markets,” said analysts at ING, in a note.
“EUR/USD may well have another leg lower to the 1.0700/0720 area once U.S. investors fully have a chance to appreciate events in European politics.”
Dollar hands back some gains
The U.S. dollar edged lower Monday, handing back some of Friday’s strong gains, as traders awaited the latest meeting as well as the release of the latest inflation data.
At 04:00 ET, the , which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.790.
The greenback received a boost late last week, climbing to a near one-month high, after data showed stronger than expected growth in in May, reducing the perceived chances of rate cuts by the Federal Reserve this year.
Markets are now pricing in 36 basis points of Fed cuts this year compared to nearly 50 bps – or at least two cuts – before the jobs data.
The Fed concludes its latest two-day policy meeting on Wednesday, and is widely expected to leave rates unchanged.
The spotlight instead will be on comments from Chair , any changes to economic projections, as well as key U.S. data.
fell marginally to 1.2724, with sterling trading in a tight range ahead of the Bank of England’s next later this month.
BOJ meeting looms large
In Asia, traded 0.1% higher to 156.90, with the yen remaining weak even as data showed Japan’s economy shrank slightly less than expected in the first quarter.
But the economy still remained squarely in contraction.
The meets later this week, and the central bank is expected to begin tightening policy by reducing its asset purchases. But how much the BOJ can tighten policy remains uncertain, given that the economy remains weak.
traded largely unchanged at 7.2477, with the pair remaining close to six-month highs as the Chinese economy continued to battle with an uneven economic recovery.
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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