Forex
Sterling slips as BoE holds rates, Swiss franc tumbles after surprise SNB cut
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© Reuters. FILE PHOTO: Woman holds U.S. dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
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By Joice Alves
LONDON (Reuters) -Sterling fell after the Bank of England (BoE) on Thursday kept its benchmark interest rate on hold as expected, while the Swiss franc fell to a multi-month low after the Swiss National Bank (SNB) surprised markets by cutting interest rates.
The BoE’s interest rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25% as the two officials who had previously called for higher rates changed their stance.
Governor Andrew Bailey said there had been “further encouraging signs that inflation is coming down” but he also said the BoE needed more certainty that price pressures in the economy were fully under control.
Sterling was last 0.3% lower on the day at $1.2742. Against the euro, it fell 0.23% to 85.62 pence, after hitting an almost three-week low.
“None of the nine MPC (Monetary Policy Committee) members opted for a hike this time around, compared with two last time. Markets took the news as dovish, with Gilts rallying and the pound weaker,” said Matthew Landon, Global Market Strategist at J.P. Morgan Private Bank.
“Still, the BoE looks more likely to be in the ‘late cutter’ camp. Even with recent progress that we have seen on price pressures, the UK still looks to be a couple of steps behind the rest of the world on their inflation battle.”
The BoE’s decision came a day after data showed inflation fell to its lowest level in almost two-and-a-half years – even if it remains higher than the bank wants.
Elsewhere, the Swiss franc fell sharply against the dollar and sank to its weakest point since last July against the euro, after the Swiss National Bank (SNB) unexpectedly cut rates.
The euro climbed against the Swiss franc to 0.978, the most since July 2023. It was last up 0.75% to 0.975. Against the dollar, the Swiss franc fell 0.84% to 0.8943, after briefly hitting its lowest since November.
The SNB cut its main interest rate by 25 basis points to 1.50%, a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.
A majority of analysts polled by Reuters had expected the SNB to keep rates on hold. It was the bank’s first rate cut in nine years.
“It’s the first central bank in the developed world to ease, so that shows the direction where the others are going,” said Jan Von Gerich, chief analyst at Nordea.
“The SNB was always the first likely mover, so this shouldn’t have an impact on what the others will do… But from the markets’ point of view, this does open the door to what could happen elsewhere,” he added.
The Norwegian crown steadied against the dollar, after Norges Bank kept its rate unchanged, as expected.
The crown was 0.1% higher to 10.5480.
The Turkish lira rallied 0.8% to 32.13 against the dollar after weeks of steady declines, as Turkey’s central bank unexpectedly raised its key interest rate by 500 basis points to 50% on Thursday, citing a deteriorating inflation outlook and pledging to keep a tight stance until there is a significant and sustained drop in the trend.
The yen steadied against a strengthening dollar as it drew some support from expectations of further rate hikes from the Bank of Japan later this year and some jawboning efforts from Japanese government officials.
The yen was last 0.1% higher on the day at 151.11, after rallying in Asian trading hours and reversing some of its heavy losses in the wake of this week’s BOJ policy shift.
The rose 0.28% to 103.51 after falling almost 0.5% on Wednesday.
In a week packed with central banks meetings, the Federal Reserve on Wednesday maintained its projections for interest rate cuts for the year in the face of upside surprises on inflation, and did not strike a more hawkish tone as some investors had feared.
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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