CAPITALDIGEST MARKET REVIEW, 18/11/2024

STERLING DRIFTS NEAR 3-MONTH LOWS VS DOLLAR

The pound hovered near three-month lows against a stronger dollar on Wednesday, after a sharp fall in the previous session following data that showed inflation was easing in the UK. Sterling dipped 0.1% to $1.2795 after hitting its lowest since early August at $1.2719 on Tuesday, after data showed regular pay for British workers grew at its slowest pace in two years in the third quarter, supporting the Bank of England’s confidence that inflation pressures will continue to ease. The BoE last week lowered interest rates for the second time since 2020 and said the Labour government’s first budget would lead to higher inflation and economic growth. Stubborn UK inflation has so far forced the BoE to cut rates more slowly than either the euro zone or U.S. central banks, helping the pound outperform major currencies against the dollar this year. However, sterling could become vulnerable if the market begins pricing in more interest rate cuts by the BoE. Traders are currently pricing in only a 15% chance of another 25-bp rate cut in December. “The risks remain skewed towards a dovish repricing and consequent negative impact on sterling, although a repricing lower in rates may take some time to materialise, as markets will tread carefully when assessing the inflationary implications of the budget,” said ING FX strategist Francesco Pesole. The pound was flat at 83.31 pence per euro . The dollar index has scaled a more-than six-month peak against other major currencies, driven by bets that incoming U.S. President Donald Trump’s policies on tax and tariffs could stoke inflation and prompt the Federal Reserve to slow the pace of interest rate cuts, or even pause them.

CANADIAN DOLLAR EXTENDS BREACH OF KEY PSYCHOLOGICAL LEVEL

The Canadian dollar weakened further beyond a key psychological level against its U.S. counterpart on Thursday, pressured by broad-based gains for the American currency and the potential for U.S. trade tariffs to hurt the domestic economy. The loonie was trading 0.3% lower at 1.4035 to the U.S. dollar, or 71.25 U.S. cents, its fifth straight day of declines. The currency touched its weakest intraday level since May 2020 at 1.4039, after briefly moving past the 1.40 level on Wednesday. “Currency forecasters have turned overwhelmingly bearish on the currency in recent months, with domestic weakness seen intersecting with U.S. outperformance and a constant drumbeat of trade threats to drive the exchange rate lower,” Karl Schamotta, chief market strategist at Corpay, said in a note.The U.S. dollar continued its relentless march higher against a basket of major currencies as investors bet that higher trade tariffs and tighter immigration under the incoming Trump administration would fuel inflation, potentially slowing the Federal Reserve’s interest rate cutting cycle. Psychological levels such as the round number of 1.40 tend to be significant for market participants. “We expect further (Canadian dollar) weakness, with technical indicators opening up an air pocket between 1.40 and 1.43, but remain wary of an overshoot,” Schamotta said. Canada sends about 75% of its exports to the United States, including oil, which could escape protectionist trade measures, according to participants in Canada’s energy industry. U.S. crude futures settled 0.4% higher at $68.70 a barrel, clawing back some recent declines for a third straight day. Canadian bond yields moved lower across a flatter curve. The 10-year was down 5.7 basis points at 3.260%.

DOLLAR RETAINS STRENGTH AGAINST PEERS ON TRUMP TRADE

The U.S. dollar strengthened against major peers on Thursday, trading at a one-year high and headed for a fifth straight session of gains, propelled by market expectations since Donald Trump clinched a dramatic return to the White House. Markets anticipate that the incoming Trump administration will impose trade tariffs and tighten immigration as well as deepen the deficit, measures deemed to be inflationary. The president-elect’s Republican Party will control both houses of Congress when he takes office in January, Edison Research projected on Wednesday, giving him wide powers to push his agenda. The greenback climbed above 156 yen for the first time since July and was last up 0.56% to 156.38 per dollar. The euro slumped to its weakest since November 2023 and was down 0.45% at $1.05165 in choppy trading. Sterling hit its lowest on the dollar in four months and was last down 0.44% to $1.2651. Following his election, the market has been looking at Trump’s appointment and seeing that he is not going to compromise on his campaign goals, whether it’s tariffs or China, said Steven Englander, head of G10 FX strategy at Standard Chartered in New York. “The market is assuming that he’s going to go ahead and implement all the things that he’s promised to do,” he said. U.S. producer prices picked up in October, the Labor Department reported on Thursday, a day after data showed that consumer inflation had barely budged last month. The number of Americans filing new applications for unemployment benefits fell last week, suggesting labor market strength, according to the Labor Department. The data did not change views that the Federal Reserve would deliver a third interest rate cut next month. Fed chair Jerome Powell said on Thursday there was no need to rush rate cuts given the strong U.S. economy. His speech echoed earlier comments on Thursday by Federal Reserve governor Adriana Kugler and Richmond Fed President Thomas Barkin. The U.S. dollar index , which measures the currency against six top counterparts including the euro and the yen, rose 0.17% to 106.64, after reaching as high as 107.07, its highest since early November 2023. The yield on benchmark U.S. 10-year notes fell 3.7 basis points to 4.414%. Bitcoin pulled back from a record high of $93,480 overnight and was last up 0.96% to $89,489. Trump has vowed to make the United States “the crypto capital of the planet.” Ethereum declined 0.27% to $3,144. The Swiss franc remained under pressure against the dollar, which was up 0.3% to 0.889 franc. The Australian dollar fell to a three-month low after marginally weaker jobs data, weakening to as low as $0.6453. “The price action that we’ve had is expected given the election outcome and the logic behind it is built on expectations rather than actualities: expectations of fiscal stimulus, tariffs and deregulation,” said Daragh Maher, head of FX strategy, Americas, at HSBC in New York.

DOLLAR NOTCHES WEEKLY GAIN AS TRADERS REASSESS RATE CUT EXPECTATIONS

The U.S. dollar was set for its biggest weekly gain in over a month on Friday, as markets reassessed expectations of future interest rate cuts and with the view that President-elect Donald Trump’s policies could be inflationary. The dollar has benefited from market expectation that Trump administration policies, including tariffs and tax cuts, could stoke inflation, leaving the Federal Reserve less room to cut interest rates. Fed Chairman Jerome Powell said on Thursday the U.S. central bank did not need to rush to lower interest rates, prompting traders to axe their more aggressive bets on a rate cut next month and beyond. The greenback was set to notch a weekly gain against the Japanese yen after it traded above 156 yen this week for the first time since July. It was last down 1.4% to 154.145 per dollar. The euro was headed for the second straight week of losses after slumping to its lowest level since October 2023. It was last up at $1.054025. “Today is more about the Fed than anything else, and I’m a bit surprised that the euro is a little stronger in the face of what were perceived to be more hawkish comments from Powell,” said Thierry Albert Wizman, global FX and rates strategist at Macquarie in New York. “People are maybe thinking that there’s going to be a bit more chaos next year in view of some of the questionableness of these (U.S. cabinet) candidate appointments. So I can see why people are losing a little bit of faith in the Trump trade and the American exceptionalism story generally.” Commerce Department data on Friday showed that U.S. retail sales increased slightly more than expected in October, but underlying momentum in consumer spending appeared to slow at the start of the fourth quarter. Boston Fed president Susan Collins in comments published Friday in the Wall Street Journal also said rate cuts could be paused as soon as the Dec. 17-18 meeting, depending on upcoming data on jobs and inflation. The probability of a December cut has dropped to around 61% from closer to 82% a day ago, according to CME’s FedWatch tool.

STERLING HEADS FOR WORST WEEKLY PERFORMANCE SINCE JANUARY

The pound headed for its biggest weekly loss since January on Friday, under pressure from weak UK economic data and a surging dollar that is getting a lift from investors’ conviction that Donald Trump’s policies will drive up U.S. growth and inflation. Britain’s economy contracted unexpectedly in September and growth slowed to a crawl over the third quarter, data showed on Friday. Sterling was unchanged on the day at $1.26795, around its lowest since May and set for a 2% decline this week, its largest weekly loss since January. President-elect Trump has vowed to levy hefty tariffs on the imports of some of the United States’ biggest trading partners, while at the same time cutting taxes at home and loosening a raft of regulations on anything from energy to cryptocurrencies. The likely impact is a rise in U.S. inflation and a possible boost to domestic growth, which has sent the dollar to its highest in around a year and eroded the pound’s erstwhile strength against the U.S. currency. Sterling has turned negative on the year against the dollar for the first time since July, down 0.4%. For most of 2024, it’s been the best-performing major currency, on the grounds that UK interest rates will take longer to fall meaningfully than U.S. ones. With the Federal Reserve looking increasingly likely to cut rates only gradually, given the outlook for a high-inflation, high-growth macro backdrop, the dollar could have more yield appeal than the pound. Money markets show traders think the Bank of England is expected to cut UK rates to around 2% by next December, compared with a projected 3.84% from the Fed. “We believe that if UK economic data continues to disappoint, the BoE may become more focused on reviving growth,” BBVA strategist Roberto Cobo said.