CAPITALDIGEST MARKET REVIEW, 21/10/2024

STERLING DRIFTS NEAR TWO-MONTH LOWS VERSUS DOLLAR

The pound drifted near two-month lows against the U.S. dollar on Thursday, after sliding a day earlier when a tame inflation report boosted Bank of England rate cut bets. Sterling was last down 0.1% at $1.29815 after breaching the key $1.30 mark on Wednesday when data showed British inflation dropped to the lowest since April 2021, and by more than economists had expected. “The sterling bears are now testing … a few pips below the 1.30 mark, to reverse the April to September positive trend and send the pair into a medium-term bearish consolidation zone,” said Swissquote Bank analyst Ipek Ozkardeskaya. Traders now see an 85% chance that the Bank of England will lower rates by 25 basis points at its next policy meeting in November, up from about 80% before the data. BOEWATCH The expectation that stubborn inflation would see the BoE lower rates more gradually then its U.S. and European counterparts had helped send the pound to a two-and-a-half year high against the greenback in late September. However, strong U.S. data reigning in hefty Fed rate cut bets and tensions in the Middle East have caused a relative repricing among currency pairs, boosting the dollar and weighing on the pound. Investors are looking to British finance minister Rachel Reeves’ first budget on Oct. 30 where she is eyeing tax rises and spending cuts to a value of around 40 billion pounds ($52 billion), two government sources told Reuters. Against the euro, sterling was little changed at 83.595 pence. A quarter point interest rate cut from the European Central Bank is nearly fully priced in at its meeting on Thursday, while President Christine Lagarde’s remarks will later be parsed for any clues on the ECB’s thinking on future moves.

US DOLLAR BUOYED BY RETAIL SALES DATA, EURO FALLS AS MORE CUTS UNDERWAY

The U.S. dollar surged to a fresh 11-week high on Thursday after data showed U.S. retail sales rose in September, reinforcing expectations that the Federal Reserve will pursue modest interest rate cuts over the next year and a half as the world’s largest economy remained resilient. Against the Japanese currency, the dollar touched 150 yen, for the first time since Aug. 1. It was last up 0.4% at 150.24 yen. The dollar index, a measure of the greenback’s value against six major currencies, was last up 0.3% at 103.81, having risen as high as 103.87, its highest since Aug. 2. “What’s going on today is a continuation of what has been going on essentially for the whole month of October,” said Eugene Epstein, head of structured products, North America at Moneycorp in New York. “Everybody is seeing the data coming in stronger than expected, so the dollar … is going higher. The dollar was actually weak going into the 50 basis-point cut by the Fed in September. Now that has been unwinding.” Thursday’s data showed U.S. retail sales rose 0.4% last month after an unrevised 0.1% gain in August. Economists polled by Reuters had forecast retail sales would rise 0.3%. A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 241,000 last week, though hurricanes and a month-long strike at Boeing (NYSE:BA) are making it harder to get a clear read of the labor market. At the same time, the euro fell after the European Central Bank cut interest rates on Thursday for the third time this year. It said inflation in the euro zone was increasingly under control while the outlook for the region’s economy has been worsening.

POUND GETS A BOOST FROM UK CONSUMER SPENDING

The pound rallied by as much as 0.5% on Friday, after data showed UK consumer spending was surprisingly strong last month, offering some reassurance about the strength of the economy, although the currency was still set for its third weekly drop. British retail sales unexpectedly rose in September, according to official data which contradicted signs that consumers were downbeat about possible tax rises ahead of the new government’s first budget later this month. Sales volumes increased by 0.3% in September, beating economists’ expectations for a monthly 0.3% fall. “Coming out of a period where elevated inflation led consumers to spend more but receive less, we are thankfully back on a path of seeing higher spending met with higher volumes of goods received,” Scope Markets strategist Joshua Mahony said. “With markets still making up their mind over the likeliness of a rate cut at both November and December BoE meetings, improved spending metrics could see dovish expectations fade somewhat,” he said. The data showed that, combined with stronger gains in July and August, sales rose by 1.9% rise in the third quarter, the joint largest increase since mid-2021. Sterling GBP=D3, which rose to a session high of $1.307 earlier in the day, was last up 0.2% at $1.3037. Against the euro EURGBP=D3, the pound was up 0.1% at 86.615 pence. It was still heading for a third weekly drop against the dollar, which has rallied over the last few weeks, as investors have grown increasingly convinced the U.S. economy is holding up well and will not need more large rate cuts to support it. The Federal Reserve delivered a jumbo 50-basis point cut in September, but signaled no alarm about the outlook for growth, which prompted traders to reduce their bets on another similar move any time soon.

CANADIAN DOLLAR FALLS FOR THIRD WEEK ON JUMBO RATE CUT BETS

The Canadian dollar steadied against its U.S. counterpart on Friday but was on track for its third straight weekly decline, as oil prices fell and investors bet on an unusually large interest rate cut from the Bank of Canada. The loonie CAD= was trading nearly unchanged at 1.38 to the U.S. dollar, or 72.46 U.S. cents, after moving in a range of 1.3786 to 1.3810. For the week, the currency was down 0.3%. “The fact that USD-CAD ends the week flirting with a break above 1.38 should not be a surprise,” said Nick Rees, senior FX market analyst at Monex Europe Ltd. “While appearing hot on the surface, the recent September’s jobs data was much weaker in the details, while a counterpart CPI print seen this week was unambiguously soft.” Growth in Canada’s consumer price index slowed more than expected to 1.6% in September, which is below the Bank of Canada’s 2% target. “Set against a backdrop of anemic growth, the data makes a strong case for the BoC to deliver a 50 bp (basis point) rate cut next week. We think they will too, suggesting that risks are skewed toward further loonie downside,” Rees said. Investors see a roughly 90% chance the BoC will cut its benchmark interest rate by half a percentage point at a policy decision on Wednesday, swaps market data showed. The policy rate is currently at 4.25%. 0#BOCWATCH It would be the fourth rate cut since June and the first reduction greater than 25 basis points in 15 years outside of the pandemic era. The price of oil CLc1, one of Canada’s major exports, fell 1.4% to $69.70 a barrel as China’s economic growth slowed and threats to supply abated in the Middle East. Canadian bond yields eased across the curve, with the 10-year CA10YT=RR down 3 basis points at 3.13%.

SOUTH AFRICAN RAND FIRMS AS FOCUS SHIFTS TO INFLATION PRINT NEXT WEEK

South Africa’s rand firmed against a weaker dollar on Friday, ahead of a domestic inflation reading next week which could provide clues on the central bank’s rate-cutting path.At 1400 GMT, the rand traded at 17.57 against the dollar, about 0.6% stronger than its previous close. The currency is still down about 1% against the greenback this week. The dollar last traded about 0.2% softer against a basket of currencies. The rand’s recovery on Friday can be attributed to a broader dollar retreat, said Danny Greeff, co-head of Africa at ETM Analytics. “The market is stabilizing after a period of dollar strength as bets on aggressive rate cuts in the U.S. were pared and a higher probability of a Trump presidential election victory was being priced in,” Greeff added. Next week, domestic investors will look to September’s consumer inflation figures which could provide clues on the South African Reserve Bank’s interest rate path. The central bank cut its main lending rate for the first time in more than four years in September, after data showed headline inflation fell just below 4.5%, the middle of the central bank’s target range. On Thursday, South Africa’s central bank governor Lesetja Kganyago said the country could move to a lower inflation target at little cost. “One of the requirements for a stable currency is low inflation; therefore, any talk of lowering the inflation target should be mildly supportive of the ZAR,” ETM Analytics said in a research note. On the Johannesburg Stock Exchange, the blue-chip Top-40 index last traded about 0.5% higher. South Africa’s benchmark 2030 government bond gained, the yield down 2.5 basis points to 9.28%. (Reporting by Tannur Anders; Editing by Hugh Lawson, Bhargav Acharya)