CAPITALDIGEST 31 MAY 2021 MARKET REVIEW

MONDAY 24/5/2021 – DOLLAR DRIFTS LOWER AS FED SPEAKERS SOOTHE INFLATION FEARS The dollar floated at the bottom of its recent range on Tuesday, as softer-than-expected U.S. data and fresh insistence from Federal Reserve officials that policy would stay on hold allayed investor fears about inflation forcing interest rates higher. The British pound rose, inching back toward the three-month high reached at the end of last week. The Turkish lira edged slightly lower, largely unfazed by the removal of one of the central bank’s four deputy governors. Investors are heavily short dollars in the belief that low U.S. rates will drive cash abroad as the world recovers from the pandemic. They have become leery of adding to positions after an April leap in inflation cast doubt on the policy outlook, but seemed to find reassurance in data and Fed remarks overnight. The dollar index softened 0.1% to 89.747 in Asia, adding to its 0.2% overnight loss to take it just above a four-month low. The euro held a 0.3% overnight gain and, at $1.2228, is close to testing last week’s four-month top at $1.2245. “Markets appear to be coming around to the Fed narrative that a burst in inflation is only likely to be temporary,” said Rodrigo Catril, a senior FX strategist at National Australia Bank in Sydney. “A temporary spike in prices should not instigate a removal of stimulatory policies from central banks.” The U.S. national activity index reading of 0.24 against expectations above 1, as well as dovish comments from Fed speakers, provided some backing for the view that any policy tightening is not happening any time soon. “I think there will come a time when we can talk more about changing the parameters of monetary policy, I don’t think we should do it when we’re still in the pandemic,” Federal Reserve Bank of St. Louis President James Bullard said overnight. TUESDAY 25/5/2021 – STERLING EDGES CLOSER TO YEAR’S HIGH  Britain’s pound neared its high for the year on Tuesday, boosted by expectations of further relaxation of social restrictions linked to the COVID-19 pandemic by the end of June. Recent gains have seen sterling close in on a nearly three-year high of $1.4240, a level last reached in February. The pound’s performance this year has been second only to the commodity-driven Canadian dollar among G10 currencies, buoyed by Britain’s fast rollout of vaccines that sparked hopes of its economy reopening. The British currency’s recent rise against the dollar has also been supported by investor concerns that rising inflation in the U.S. could prompt interest rate increases. British policymakers on Monday had adopted a relaxed tone about inflation, helping the pound to hold on to recent gains and setting expectations of a similar tone from the central bank’s interest rate-setter Silvana Tenreyro who speaks at 1600 GMT. Bank of England Governor Andrew Bailey had said on Monday he does not see long-term implications from an expected pick-up in inflation. By 0748 GMT sterling was up 0.25% on the day against the dollar at $1.4190 and flat to the euro. With no major economic data due on Tuesday, analysts saw the positive momentum generated by recent vaccine news as the likely main driver for the pound. (Reporting By Lawrence White. Editing by Jane Merriman) WEDNESDAY 26/5/2021 – POUND TRADES SIDEWAYS VS. DOLLAR AND EURO AMID THIN DATA CALENDAR Britain’s pound traded within recent ranges against the dollar and the euro on Wednesday, as a lack of fresh economic catalysts in a sparse data calendar kept the currency in consolidation mode. Sterling is the second best-performing G10 currency versus the dollar this year, up 3.4% year-to-date and trailing only the commodity-linked Canadian dollar. That performance is a result of investors betting on a quicker reopening for Britain’s economy on the back of its rapid COVID-19 vaccination pace. Britain commenced a third part of a phased reopening last week, allowing indoor dining in pubs and restaurants. Economic indicators such as retail sales are looking up, as are surveys of purchasing managers across industries. By 0809 GMT, sterling was 0.05% lower against the dollar at $1.4138, some way off a three-month high of $1.4233 hit last week. The pound was flat versus the euro at 86.57 pence, and off a two-week low of 86.20 hit against the common currency on Tuesday. The only event with potential to move the currency in an otherwise thin data calendar on Wednesday was a testimony by British Prime Minister Boris Johnson’s former chief adviser, Dominic Cummings. Cummings, the strategist behind the 2016 Brexit campaign and Johnson’s landslide election win in 2019, will be quizzed by British lawmakers from 0830 GMT on the lessons that can be learned from the pandemic. Cummings, who left the government late last year, has said the British health ministry was a “smoking ruin”, that Western governments failed during the crisis, and that the secretive British state was woefully unprepared for the pandemic. THURSDAY 27/5/2021 – DOLLAR INDEX SLIPS IN MIX OF GAINS, LOSSES ON MAJOR CURRENCIES The dollar index traded in a narrow range on Thursday as the greenback held steady against the euro, lost ground to the British pound and Canadian dollar and gained on the Japanese yen. The diverging performances in the currencies came with changes in economic outlooks for their home countries and evolving views on when, and by how much, different central banks will pull back on easy money policies to control inflation in their recoveries from the COVID-19 pandemic. In late afternoon in New York, the dollar had gained 0.6% on the yen, and lost 0.5% to the Canadian dollar. Sterling picked up 0.5% to $1.42 and the euro was up less than 0.1% at $1.22. The dollar index was down 0.1% for the day, holding on to most of a 0.4% gain on Wednesday. The moves came as new U.S. economic data on Thursday showed a greater-than-expected decline in new unemployment claims and an acceleration in business spending on equipment. Also supporting the dollar, U.S. Treasury yields rose on concerns about the coming supply of government debt after the New York Times reported that President Joe Biden will announce on Friday a $6 trillion budget for 2022. The yield on the 10-year note was up to 1.605 in from 1.574 on Wednesday. The yen, trading at 109.785 to the dollar, has lost 1% in two days since the Japanese government slashed its economic outlook for the first time in three months. The British pound rose suddenly when a Bank of England policymaker said the central bank is likely to raise interest rates well into next year but that an increase could come earlier. “The market is reacting to a hawkish headline and that’s why we saw sterling gallop,” said Erik Bregar, head of FX strategy at Exchange Bank of Canada. Sterling’s strength helped to lift the Canadian dollar against the greenback, Bregar added. Higher oil prices helped the loonie, too. FRIDAY 28/5/2021 – DOLLAR EDGES UP AHEAD OF INFLATION DATA; YEN FALLS The dollar strengthened further on Friday following its rise from more than four-month lows in recent sessions, as investors waited for U.S. inflation data to set the currency’s direction. The U.S. dollar index picked up in the late Asian and early European session, trading up 0.1% on the day at 90.78 at 0740 GMT. The United States and Britain have a public holiday on Monday, meaning the dollar’s gains could be attributed to month-end demand. Versus the yen, the dollar was near a seven-week high. The pair changed hands at 109.875, a move which prompted analysts to note Japan’s rise in unemployment, fall in consumer prices and news that the government is considering extending a state of emergency over the COVID-19 pandemic. “But let’s not delude ourselves: all these developments will not have any effect on Japanese monetary policy,” wrote Commerzbank strategist Esther Reichelt in a note to clients. “And as a result, it is US monetary policy and the US dollar as well as risk sentiment that primarily drive USD-JPY. Short term we might see an uptrend again but over the further course of the year we expect to see a weaker dollar and as a result lower USD-JPY levels.” The euro was down 0.1% at $1.21875, hovering below its recent high of $1.2266, as dovish comments from European Central Bank officials sapped its momentum ahead of the policy meeting on June 10. The New Zealand dollar, which earlier in the week jumped on the prospect of an interest rate hike by September 2022, was down 0.6% at 0.7247. The Australian dollar was down 0.3% at 0.7722. China’s onshore yuan hit a new three-year high, on track for its best week since November. Chinese regulators said late on Thursday that they will crack down on manipulation of the forex market while reiterating no change to the country’s currency policy. The British pound was down 0.2% at around $1.41835, on track for its best month versus the dollar so far this year.