CAPITALDIGEST MARKET REVIEW, 12/08/2024

STERLING REBOUNDS FROM FIVE-WEEK LOW AND RALLIES AGAINST YEN

The pound rose on Wednesday after falling to a five-week low the previous day, and climbed sharply against the yen after a Bank of Japan official played down the chances near-term rate hikes. Sterling was last up 0.27% at $1.2726 after falling to $1.2674 on Tuesday, the lowest since the start of July. The pound has fallen from a one-year high above $1.30 in July, pulled down by expectations that the Bank of England would cut rates, which it did in early August, and a selling of currencies deemed riskier investments during the recent turbulence. Sterling fell on Monday and Tuesday even as the dollar dropped following weak economic data, as investors moved out of currencies deemed to be more closely linked to the health of the global economy. The focus in currency markets on Wednesday was on the Japanese yen, which dived after an influential Bank of Japan official said a further rate hike was not under consideration while markets were so volatile. BOJ Deputy Governor Shinichi Uchida’s comments helped soothe nerves across global markets, where a rapid rally in the yen had caused investors to unwind other investments and was a key factor in sending stocks tumbling. Sterling was last up 1.88% against the yen at 186.92 yen , although it remained 3% lower for the month after the Japanese currency’s powerful rally. “Uchida’s dovish remarks following the (Bank of Japan) rate hike on July 31 provided relief to markets, resulting in a rebound in Japanese equities and a depreciation of the yen against the dollar,” said Charu Chanana, Saxo’s head of FX strategy. The pound was up against the euro , which rallied this week as investors sold the dollar. The euro was last 0.44% lower at 85.78 pence, after hitting a three-month high of 86.2 pence on Monday.

DOLLAR GAINS AFTER US JOBLESS CLAIMS FALL MORE THAN EXPECTED

The dollar rose on Thursday after new U.S. labor market data showed that unemployment benefits fell more than expected last week, easing fears of an imminent recession. The greenback’s rise was most prominent against the yen, following a sharp drop the day before in a volatile week in which investors have had to digest the unwinding of popular carry trades and how Japanese monetary policy might evolve. Initial jobless claims fell to a seasonally adjusted 233,000 for the week ended Aug. 3, the Labor Department said on Thursday, suggesting fears that the labor market is unraveling were overblown. The yen was last down 0.37% at 147.205, having slid 1.6% on Wednesday, after the Bank of Japan’s Deputy Governor Shinichi Uchida played down the chance of a near-term hike in interest rates that would typically boost the currency. The sharp moves in the yen pushed the dollar index , which measures the U.S. currency against six others, including the yen, to a weekly high, before backing off. It was last up to 103.21, above Monday’s seven-month low of 102.15. Still, market participants were bracing for more volatility. “Regardless of the fact that risk is a bit higher today, the degree of these swings that we’re having on a seemingly daily basis, or at least every other day, I don’t think is a healthy sign,” said Eugene Epstein, head of structured products, North America, at Moneycorp. The yen started the week by scaling a seven-month high of 141.675 per dollar, a far cry from the 38-year lows where it traded in early July, after soft U.S. jobs data last week stoked recession worries and roiled investors. A surprise rate hike from the BOJ last week also forced investors to bail out of carry trades, in which they borrow the yen at low rates to invest in dollar-priced assets for higher returns. This unwinding gave the yen a boost.

STERLING INCHES UP BUT STILL NEAR ONE-MONTH LOWS

The British pound edged up on Thursday, but remained close to this week’s one-month lows against the dollar, as a sense of stability returned to markets after an intensely volatile start to the week. Sterling was last up 0.1% on the day at $1.27025, but still headed for a fourth weekly decline, having fallen nearly 1% so far this week, marking its longest stretch of weekly losses in almost a year. The euro , which hit its highest against the pound since late April on Thursday, was up 0.1% at 86.15 pence. The Bank of England’s knife-edge decision to cut interest rates last week dented the pound. But since then, concern about a hard landing for the U.S. economy, among other factors, has triggered a selloff in risk assets, sweeping sterling lower along with other global markets. On Thursday, however, the dollar side of the currency pair was under more pressure. Traders are currently pricing in a full percentage point in Federal Reserve rate cuts this year, compared with around 45 basis points for the BoE, which in theory gives the pound an advantage. Sterling is only down around 0.2% this year, still the best performance from a major currency against the dollar, compared with a 1% drop in the euro – the runner-up – or the 6.4% drop in the Norwegian crown , the worst performer. That said, with the BoE now in rate-cutting mode and risk appetite looking fragile, sterling could struggle to make further headway, Chris Beauchamp, a market strategist at IG, said. “After being knocked back from its gains yesterday, the price has moved higher,” he said. “​However, while a higher low is still a possibility here, it will need more than one day of gains. Sterling has been unable to manage this over the past month, with intraday bounces failing to carry over into the new session. Until this changes, the sellers remain in control.”

DOLLAR DIPS AS YEN HEADS FOR FIRST WEEKLY DROP IN SIX

The dollar was off a one-week high against other major currencies on Friday, capping off a turbulent few days as traders digested a drop in U.S. jobless claims and the prospect of a looming economic downturn. The U.S. currency was down against the Japanese yen following a three-day rebound, as Thursday’s firmer-than-expected employment data spurred a paring back in bets for Federal Reserve interest rate cuts later this year. The yen and the Swiss franc – another safe haven currency – hung near one-week lows as major stock markets rose and Treasury yields dipped. Markets have endured a chaotic week, triggered in large part by surprisingly soft U.S. payrolls figures a week ago that sent global stocks tumbling, while demand for the safety of assets such as the yen and the franc sent those currencies surging to their highest since the start of the year on Monday. The dollar was last down 0.39% at 146.675 yen , but still on course for its first weekly rise in six weeks. “There’s been a major desire by market to finally use the yen as a complete source of a safe haven to the chaos and the conflict that’s going on around the world,” said Juan Perez, director of trading at Monex USA in Washington. The dollar index , which measures the currency against six others, was down 0.136% at 103.14 following three days of gains. Against the Swiss franc, it eased 0.18% to 0.865 franc but still on track for a weekly advance. “The prospect of having a pure risk-on environment, pro carry for FX, for the second half of this year, is much less interesting given our forecasts are more conservative on the dollar/yen and the euro/Swiss franc,” said UBS FX strategist Yvan Berthoux. “We don’t expect more significant unwind to come. The washout has been quite clear in this environment.”

STERLING ON TRACK FOR FOURTH WEEK OF DECLINE VERSUS DOLLAR

The British pound steadied against the dollar on Friday but was set for its fourth consecutive week of declines, as investors weighed the prospect of more interest rate cuts from the Bank of England (BoE) amid concerns about slowing global growth. Sterling was flat against the dollar at $1.2754. It fell to a more than five-week low of $1.2666 on Thursday but closed up 0.5% as the dollar side of the currency pair came under more pressure. The pound’s recent fall has been triggered by volatile trading across global markets after soft U.S. jobs data last week raised fears of an economic downturn and bigger interest rate cuts from the Federal Reserve. The currency was already near a one-month low last week when the BoE cut rates for the first time since 2020 in a 5-4 vote that took borrowing costs down to 5%. Money markets show traders are pricing in further rate cuts of 42 basis points (bps) from the BoE by the end of this year, compared to 46 bps a week ago and 56 bps priced in at the peak of the market turmoil on Monday. Traders currently expect rate cuts of 103 bps from the Federal Reserve by the end of 2024. Against the euro, sterling firmed for a third consecutive session to 85.59 pence. Euro/sterling touched a more than three month high of 86.25 pence at one point on Thursday. “The huge gains of late July and early August mean that this is not surprising, but overall the new bullish view remains in place,” noted Chris Beauchamp, chief market analyst at IG. “If the price holds the 200-day (simple moving average) then a rebound towards £0.86 may develop. A close back below 85 pence in coming weeks might signal that a lower high has been created.” The 200-day SMA is currently around 85.566 for euro/sterling. Against the yen, the biggest mover in currency markets in recent weeks, the pound held steady at 187.83 yen, rebounding from its weakest level since January hit on Monday at 180.05 yen.