CAPITALDIGEST MARKET REVIEW, 13/01/2025

 DOLLAR CLIMBS FOR 3RD STRAIGHT SESSION, STERLING WEAKNESS CONTINUES

The U.S. dollar strengthened for a third straight session on Thursday as Treasury yields dipped but held at elevated levels on concerns over tariffs under the incoming Trump administration, while sterling’s recent weakness persisted. U.S. Treasury yields have been on an uptrend, with the benchmark 10-year note hitting an 8-1/2 month high of 4.73% on Wednesday as a resilient economy and likely tariffs have rekindled inflation concerns and heightened expectations the Federal Reserve will take a slower path of interest rate cuts. Recent economic data has shown a labor market on a solid footing and minutes from the Fed’s December meeting showed that policymakers raised new inflation concerns suggesting the new administration’s plans may slow economic growth and increase unemployment. Investors will eye Friday’s key government payrolls report to gauge how aggressive the central bank will be in cutting interest rates.

STERLING HITS 14-MONTH LOW AFTER US JOBS DATA, GILT YIELDS RISE

British assets remained under pressure on Friday from elevated global borrowing costs, with sterling falling for the fourth day in a row and gilt yields rising for a fifth consecutive day, with better-than-expected U.S. jobs data intensifying the moves. After recording a moderate decline earlier on Friday, the pound continued its slide and gilt yields jumped after U.S. government data showed employers added far more jobs than expected in December. The pound fell 0.75% against the dollar and hit $1.2194 , its lowest since November 2023, surpassing Thursday’s 14-month low. British 30-year gilt yields rose to their highest since July 1998 after the data at 5.445%, up 6 basis points on the day, while rate futures markets showed traders trimmed their expectations for Bank of England rate cuts this year to 44 bps from 49 bps. Benchmark 10-year gilt yields edged up 6 basis points (bps) on Friday to 4.87%, but remained below Thursday’s high of 4.925%, their highest since 2008. The UK has been among the markets most hit by a surge in global borrowing costs, which most analysts say originated in the U.S. due to concerns about rising inflation, reduced chances of a drop in interest rates, and uncertainty over how U.S. President-elect Donald Trump will conduct foreign or economic policy.

CANADIAN DOLLAR SNAPS WEEKLY LOSING STREAK AFTER JOBS GAIN

The Canadian dollar weakened against its U.S. counterpart on Friday as the greenback notched broad-based gains, but the loonie still notched a modest weekly advance as domestic jobs data cooled bets on a Bank of Canada rate cut this month. The loonie was trading 0.2% lower at 1.4425 to the U.S. dollar, or 69.32 U.S. cents, after moving in a range of 1.4376 to 1.4442. For the week, the currency was up 0.2%, after six straight weekly declines. It touched a near five-year low of 1.4467 on Dec. 19. “It’s not Canada’s fault,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC. “I’d say the real theme is U.S. exceptionalism, or U.S. outperformance.” The U.S. dollar rallied across the board after data showed the American economy created more jobs than expected last month, reinforcing expectations the Federal Reserve will pause its rate-cutting cycle. Market participants are trying to determine whether the sideways pattern for USD-CAD since mid-December is a sign of a top or the base from which the pair takes another leg higher, Chandler said, adding “I think we’re going to get another leg up.”

SOUTH AFRICAN RAND HOVERS NEAR 9-MONTH LOW AGAINST BUOYANT DOLLAR

South Africa’s rand hovered near a nine-month low early on Monday against a buoyant dollar, amid an uncertain outlook for further interest rate cuts by the Federal Reserve. At 0721 GMT, the rand traded at 19.1525 against the dollar, about 0.3% softer than its previous close. It hit 19.2050 per dollar on Friday, its weakest level since late April. The dollar was last trading about 0.21% stronger against a basket of currencies, after surging to its highest in over two years at the expense of emerging market currencies such as the rand. Data on Friday showed U.S. job growth unexpectedly accelerated in December while the unemployment rate fell, underscoring the strength of the world’s largest economy and leaving traders heavily scaling back bets of Fed rate cuts in 2025. On the stock market, the Top-40 index was down about 1%. South Africa’s benchmark 2030 government bond was weaker, with the yield up 5.5 basis points to 9.32%.

DOLLAR CLIMBS FOR 3RD STRAIGHT SESSION, STERLING WEAKNESS CONTINUES

The dollar began the week on a strong note on Monday, leaving its peers languishing near multi-year lows after a blowout U.S. jobs report that underlined the outperformance of the world’s largest economy versus the rest of the world. The euro and the New Zealand dollar were pinned close to a more than two-year trough at $1.0242 and $0.5565, respectively, in the early Asian session. Trading was thinned with Japan markets closed for a holiday. The Australian dollar struggled to break away from its weakest level in over four years of $0.6139. It last traded 0.1% higher at $0.6153. Data on Friday showed U.S. job growth unexpectedly accelerated in December while the unemployment rate fell to 4.1% as the labour market ended the year on a solid footing, leaving traders heavily scaling back bets of Federal Reserve rate cuts this year. “This latest round of data underlines the fact that U.S. economic exceptionalism remains a key market theme to start 2025,” said Nick Rees, head of macro research at Monex Europe. “The U.S. labour market has stabilised but is not continuing to unwind, and that combined with upside inflation risks stemming from the new (Donald) Trump administration … should support an extended pause to easing by the FOMC.” Markets are now pricing in just 27 basis points worth of Fed rate cuts this year, down from roughly 50 bps at the start of the year.