CAPITALDIGEST MARKET REVIEW, 2/5/2023

DOLLAR WEAKENS ON FRESH SIGNS OF SLOWDOWN, EURO REBOUNDS The dollar retreated on Wednesday on fresh signs of a U.S. slowdown after orders for core capital goods fell more than expected in March, while the economic outlook for Europe could surprise to the upside and strengthen the euro. The Swedish crown weakened sharply after the country’s central bank was less hawkish than expected, while the euro rebounded 0.6% from losses on Tuesday when jitters over U.S. banks buoyed the safe-haven dollar. The dollar index, which measures the currency against six major rivals, fell 0.354% as new orders for key U.S.-manufactured capital goods fell more than expected last month, the Commerce Department said. Unfilled orders continued a steady decline, indicating there was less in the pipeline to drive activity and that business spending on equipment was likely a drag on first-quarter growth. Meanwhile, Germany raised its economic forecast for growth this year to 0.4% from a previously predicted 0.2%, according to government spring economic projections published on Wednesday. “Europe is taking a lot of people by surprise,” said Ed Moya, senior market analyst at OANDA in New York. “There’s still a lot of risks for their economy, their outlook. But this is still a market that is rather stunned by what we’re getting out of Europe.” Driving the dollar versus major currencies are early signs of a U.S. slowdown and decelerating inflation that will be greater than other economies, said Thierry Wizman, global FX & interest rates strategist at Macquarie in New York “Whatever slowdown we’re going to see in the U.S. is going to come earlier and it’s going to be more intense, at least in its early stages, than whatever we’re going to see coming out of the rest of the world,” Wizman said. “The disinflation that we’re seeing or going to see in the U.S. in final goods and services prices, is going to be more intense, more significant, than whatever disinflation that we get in the rest of the world,” he said. STERLING STEADIES AGAINST DOLLAR, JUST BELOW RECENT HIGH Sterling steadied against the dollar on Thursday, after two volatile days largely canceled each other out, leaving the British currency not far off a 10-month peak. The pound was flat at $1.2471, having risen 0.48% on Wednesday and fallen 0.58% on Tuesday as markets vacillated over whether U.S. banking jitters and a standoff over the debt ceiling was good or bad news for the dollar. The pound was flat at $1.2471, having risen 0.48% on Wednesday and fallen 0.58% on Tuesday as markets vacillated over whether U.S. banking jitters and a standoff over the debt ceiling was good or bad news for the dollar. “Risk aversion is positive for the dollar, but it looks like the problems are concentrating in the U.S. so that means if there is a response from central banks its going to be larger in the U.S.,” said Jan von Gerich, chief analyst at Nordea.. A conveyor belt of interest rate hikes in Europe just as U.S. rates near a peak have been supporting the pound and euro. Sterling hit a 10-month high of $1.2545 on 14 April. Von Gerich said as for the pound/dollar pair specifically “in the short term it is a dollar story, but of course we have a Bank of England meeting coming up and they will not have an easy choice because of the inflation picture.” Britain was the only country in western Europe with double-digit inflation in March. The BoE’s next rate setting meting is on May 11. The pound has largely managed to cling to the coattails of the resurgent euro, and on Thursday the European single currency was up 0.1% at 88.67 pence, within its recent range.By contrast the euro hit a one year high against the dollar on Wednesday. The pound’s moves against the tumbling Australian dollar have been particularly dramatic, and it hit at 14-month high of A$1.8929 on Wednesday, a near 10% gain since the pound’s early Feb low. US DOLLAR EDGES HIGHER AS GDP, JOBLESS CLAIMS AFFIRM RATE HIKE BETS The dollar rose on Thursday as weaker-than-expected U.S. economic growth in the first quarter is viewed as not likely to deter the Federal Reserve from raising interest rates next week. The advance estimate of first-quarter gross domestic product (GDP) showed a 1.1% annualized rate during the period. The economy grew at a 2.6% pace in the fourth quarter. Economists polled by Reuters had forecast GDP rising at a 2.0% rate. However, investors focused on the quarterly inflation number within the GDP report. Core personal consumption expenditure prices rose 4.9% in the first three months of the year, higher than the 4.7% consensus and up from the fourth quarter figure. “The weaker growth outlook is telling us that the Fed is going to struggle to keep on hiking interest rates without crushing the economy,” said Amo Sahota, director at FX consulting firm Klarity FX in San Francisco. “But the conundrum of what to do with inflation is still persistent. The Fed has been telling us that for a long time. So that (core PCE) number just hardened the fact that we’re going to have a rate hike next week,” he added. Markets have priced in a 90% probability of a 25 basis-point rate increase at the May policy meeting, with a pause factored in after that. A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits decreased 16,000 to a seasonally adjusted 230,000 for the week ending April 22. Economists had expected 248,000 claims in the latest week. The report suggested a still-tight labor market and also underpinned next week’s rate increase expectations. In afternoon trading, the dollar rose 0.2% against the yen to 134 yen as the Bank of Japan began a two-day policy meeting, the first under new governor Kazuo Ueda. STERLING RISES TO SIX-MONTH HIGH AGAINST THE YEN Sterling on Friday climbed against the yen to its highest in almost six months after the Bank of Japan left its ultra-easy monetary policy unchanged, sparking a broad-based drop in the Japanese currency. The yen fell against major currencies from the dollar to the euro after the BOJ decision, even as it scrapped a pledge to keep interest rates low. Sterling rose 1.2% against the yen GBPJPY=EBS to as high as 169.47, its highest since early November 2022. “If you don’t get catalyst for yen appreciation, you get moves like you are seeing in sterling-yen,” said Stephen Gallo, global currency strategist at BMO Capital Markets. “It’s more of a yen story.” The pound GBP=D3 fell 0.2% versus the dollar, meanwhile. Against a basket of currencies, the dollar =USD was up 0.5%, but still was on track for a second straight monthly loss. Sterling rose 0.1% against the euro EURGBP=D3. Interest rate hikes in Europe just as U.S. rates near a peak have been supporting the pound and euro of late. Sterling hit a 10-month high of $1.2545 on 14 April. “Pressure does look to be building for a move higher later in the year, however,” ING analysts wrote.However, Britain was the only country in western Europe in March with double-digit inflation. Some market players see further pain ahead for the British economy unless the Bank of England brings inflation down and growth picks up. DOLLAR ADVANCES AS INFLATION DATA AFFIRMS FED RATE HIKE NEXT WEEK The U.S. dollar rose on Friday after data showed inflation grew in March, though at a slower pace, keeping the Federal Reserve still firmly on track to raise interest rates at next week’s monetary policy meeting. The dollar index, a measure of the greenback’s value against six major currencies, rose 0.7% to 102.10 =USD. Against the yen, the U.S. currency rose 1.5% to 136.07 yen JPY=EBS. The euro, meanwhile, fell 0.4% against the dollar to $1.0984 EUR=EBS Friday’s data showed thepersonal consumption expenditures (PCE) price index edged 0.1% higher in March after rising 0.3% in February. In the 12 months through March, the PCE price index increased 4.2% after climbing 5.1% in February. Excluding the volatile food and energy components, the PCE price index inched up 0.3% after increasing at the same rate in February. The so-called core PCE price index gained 4.6% on a year-on-year basis in March after rising 4.7% in February. The Fed tracks the PCE price indexes for its 2% inflation target. “It’s another mixed bag of data, but what stands out is the frustratingly slow descent in core inflation,” said Joe Manimbo, senior market analyst at Convera in Washington. “So, the dollar’s benefiting from elevated core inflation, which I think is leading the market to rethink the outlook for rate cuts later this year and I think it sets the stage for the Fed to reiterate that interest rates are likely to remain higher for longer.” Following the data, the rate futures market has priced in a 90% chance of a 25 basis-point hike next week.