CAPITALDIGEST MARKET REVIEW, 06/01/2025

STERLING TRIES TO REBOUND AGAINST RELENTLESS DOLLAR

Sterling struggled to rebound against the dollar on Friday and was on track for its worst week since November, while new data added to indications of a slowing British economy. The pound edged up 0.1% to $1.2395, having slid 1.16% on Thursday. The currency hovered close to the April lows it hit the previous day and looked set to end the week 1.4% lower. Global currencies, including the pound and the euro, recorded steep losses against the dollar on Thursday when investors returned from the New Year holidays. Expectations for U.S. rates to stay higher for longer as markets brace for the incoming Donald Trump administration, whose policies traders think could boost economic growth, has sent the dollar rallying ahead of other global currencies for the past three months. A souring outlook for the British economy, coupled with a more dovish signals from the Bank of England (BoE), has taken another chip off the pound, despite being last year’s best performing G10 currency against the greenback. British lenders approved fewer mortgages than expected in November and consumer lending increased at the weakest pace since mid-2022, Bank of England data showed on Friday, adding to indications of a slowing economy.

 DOLLAR ON TRACK FOR BEST WEEK IN A MONTH

The dollar dipped on Friday but was on track for its strongest weekly performance in a month on expectations that the U.S. economy will continue to outperform its peers globally this year and that U.S. interest rates will stay relatively higher. A still solid labor market and stubbornly high inflation have lifted Treasury yields in recent weeks and boosted demand for the U.S. currency. New policies under the incoming Donald Trump administration, including business deregulation, tax cuts, curbs on illegal immigration and tariffs, are also expected to boost growth and add to price pressures. The dollar index was last down 0.28% on the day at 108.91, after hitting a two-year high of 109.54 on Thursday. It is on track for a weekly gain of 0.85%. Despite recent dollar gains there remains considerable uncertainty over when policies will be introduced by the new U.S. government, and what their ultimate impact will be. That could pause the dollar rally in the near-term.”We’re likely to see a bit of a dollar pullback as the administration comes in because all these proposed tariffs – they’re going to take some time to implement and we don’t actually know if all of these proposals are going to be implemented or not,” said Helen Given, FX trader at Monex USA in Washington.

CANADIAN DOLLAR POSTS SIXTH STRAIGHT WEEKLY DECLINE

The Canadian dollar weakened against its U.S. counterpart on Friday and extended a streak of weekly declines as investors weighed multiple headwinds for the commodity-linked currency, including a faltering Chinese economy. The loonie was trading 0.3% lower at 1.4440 to the U.S. dollar, or 69.25 U.S. cents, moving closer to a near five-year low that it touched last month at 1.4467. The currency traded in a range of 1.4384 to 1.4463, while it posted a weekly decline of 0.2%. That was its sixth straight weekly decline, the longest such stretch since August 2023. “Much of the Canadian dollar weakness in the last year has been U.S. dollar strength but that’s not the case today,” said Adam Button, chief currency analyst at ForexLive. “As a global growth proxy, for the Canadian dollar to work in 2025 we need to see a resurgent China and China is struggling.” Canada is a major commodities producer so the loonie tends to be sensitive to prospects for global growth. China will sharply increase funding from ultra-long treasury bonds in 2025 to spur business investment and consumer-boosting initiatives, a state planner official said, as Beijing cranks up fiscal stimulus to revitalize the world’s second-biggest economy.

SOUTH AFRICAN RAND STARTS 2025 ON FRONT FOOT

South Africa’s rand started the new year on a positive note on Thursday after a volatile end to 2024. At 0803 GMT, the rand traded at 18.7625 against the dollar , about 0.6% stronger than its previous close. Like most emerging market currencies, trade in the rand was turbulent in November and December after Donald Trump was elected U.S. president, amid uncertainty over his promised tariffs and other policies and a more hawkish Federal Reserve outlook. “The short-term outlook for the local currency remains negative as international factors and the strength of the Dollar weigh,” Andre Cilliers, currency strategist at TreasuryONE, wrote in a note. On the stock market, the Top-40 (.JTOPI), opens new tab index was up about 1%. South Africa’s benchmark 2030 government bond was marginally stronger, with the yield down 1 basis point to 9.04%.

DOLLAR RALLY PAUSES; YUAN SLIDES TO 16-MONTH LOW

The dollar eased on Monday but held close to a two-year peak, as traders awaited a raft of U.S. economic data this week headlined by December’s nonfarm payrolls report for further clues on the Federal Reserve’s rate outlook. In Canada, Prime Minister Justin Trudeau is increasingly likely to announce he intends to step down, though he has not made a final decision, a source told Reuters. The Globe and Mail earlier reported that Trudeau was expected to announce his resignation as early as Monday. Markets appear to have largely priced that in and might welcome an election to clarify matters, leaving the U.S. dollar down 0.36% against its Canadian counterpart to C$1.4395 . Also in focus was the Chinese yuan, which on Friday weakened past the psychological level of 7.3 per dollar in the onshore market for the first time in 14 months, after the People’s Bank of China (PBOC) had aggressively defended that key threshold for most of December. The onshore yuan slid a 16-month low of 7.3289 per dollar, while its offshore counterpart ticked up 0.06% to 7.3558. “The PBOC looks to have stopped defending that 7.30 level,” said Ray Attrill, head of FX strategy at National Australia Bank (NAB).