CAPITALDIGEST, MARKET REVIEW. 24 JANUARY, 2022

MONDAY 17/1/2022 – DOLLAR EDGES UP AS TRADERS ASSESS FED RATE HIKE BETS The dollar edged higher on Monday as traders continued to hold on to dollars but took the view that Federal Reserve tightening plans were largely priced in, while the euro eased from Friday’s two-month high. An unexpected cut to key lending rates in China highlighted it as the outlier, with other major central banks in talks to raise rates. China’s move only briefly weighed on the yuan. The U.S. dollar index =USD , which declined sharply last week until Friday’s leap, rose 0.1% to 95.323 at 1340 GMT. The cash Treasury market was closed for a holiday on Monday. “With 3.7 Fed rate hikes priced in for 2022 and 2.3 for 2023, market participants seem to be inferring that the risks to policy pricing are now more balanced,” Goldman Sachs told clients. The Fed meets on Jan. 25-26 and is not expected to move rates yet. Speculators’ net long U.S. dollar positions, or bets that the dollar will rise, edged lower in the week to Jan. 11, but they remained close to recent highs, suggesting investors are keen to hold the greenback amid “hawkish rhetoric from the Fed in recent months”, Rabobank told clients. “However, the sell-off in USDs in the spot market last week suggests that long positions had become crowded,” Rabobank analysts said. The euro EUR=EBS slipped 0.2% versus the dollar at $1.1396, after rising on Friday to a two-month high. With no major economic data for the euro zone on the calendar this week, investors will focus on speeches from President Christine Lagarde, other ECB members and on the minutes of the ECB’s December policy meeting out on Thursday.   TUESDAY 18/1/2022 – STERLING HITS WEEK LOW AS DOLLAR STRENGTH, POLITICAL RISK WEIGH Sterling fell to its lowest level in a week against the dollar on Tuesday as a jump in U.S. Treasury yields boosted the greenback and speculation about the fate of Boris Johnson’s premiership also weighed on the British currency. The prime minister denied an accusation by a former adviser that he had lied to parliament about a lockdown party but it was unclear whether he would survive the scandal politically. Traders had seemed happy to ignore the turmoil, but its seriousness is starting to weigh on the pound, CIBC strategist Jeremy Stretch said. While it is unclear how a change of prime minister would impact the pound in the long run, the immediate uncertainty is clearly a negative, he said. “The first reaction from investors from outside the local market is ‘sell first and ask questions later’,” Stretch said. Early morning data showing British employers added a record number of staff in December failed to prop up sterling. The 184,000 employees added to British payrolls may vindicate traders who priced in another Bank of England interest rate hike in February, but pay’s weakest performance since July 2020 might also reassure those hoping for more dovish policies. In December, the BoE became the first major central bank to raise interest rates since the pandemic took hold in 2020. In response, the pound rallied over 4% from its December lows, but has lost ground in the last three sessions.   WEDNESDAY 19/1/2022 – US DOLLAR WEAKENS BUT KEEPS POSITIVE OUTLOOK; POUND STERLING RISES AFTER UK DATA The dollar slid on Wednesday, with US Treasury yields also falling after hitting roughly two-year highs on 2-year and 10-year bonds, but the greenback remains well-supported, as Investors have been preparing for a widely expected rate hike in March. US 10-year Treasury yields hit a fresh two-year high of 1.902% on Wednesday but were last down 4 basis points to 1.8271%. Bond yields in other major economies also rose, with the euro, sterling, Canadian, Australian and New Zealand dollars strengthening against the US currency, among others. Sterling, meanwhile, rose after data showed that UK inflation rose 5.4% in December, a 30-year high, raising expectations for a rate hike. However, talks of a leadership challenge from Prime Minister Boris Johnson have kept the pound in check. Continue reading “Central banks are now getting evidence that the fourth quarter hasn’t necessarily slowed the pace of inflation, and indeed countries like the UK are seeing CPI numbers not seen since the early 1990s,” said Juan Perez, senior FX trader and strategist at Monex USA in Washington. “We see the dollar gaining near-term, but we are not sleeping on other currencies in the short-term as pricing in Fed hikes becomes an afterthought,” he added. The Fed is due to meet next week and is expected to provide clarity and details on the end of quantitative easing, possibly in March. The US Federal Reserve could also signal that it will hike rates again in March, right after quantitative easing ends.   THURSDAY 20/1/2022 – STERLING HITS 23-MONTH HIGH VERSUS EURO ON RATE HIKE EXPECTATIONS Sterling hit a fresh 23-month high and rose versus a weakening dollar on Thursday, still supported by expectations of rate rises, but with analysts questioning if the Bank of England (BoE) will be able to provide a hawkish surprise at its February meeting. Money markets currently price in more than 100 basis points (bps) in interest rate rises in 2022 and an 87% chance of a 25 bps increase in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December. Domestic politics did not hurt sentiment, although Prime Minister Boris Johnson was fighting to save his premiership amid a deepening revolt inside his party over a series of lockdown parties in Downing Street. Sterling rose 0.3% against the euro to a fresh 23-month high at 83.07 pence at 1528 GMT. “If anything, there is a risk of the BoE disappointing the market by acting less decisively” at its February meeting, Commerzbank analysts said, adding “a lot has already been priced in” in terms of future rate rises.   FRIDAY 21/1/2022 – DOLLAR REVERSES LOSSES, SHOWS MODEST GAIN FOLLOWING 10-YEAR TIPS AUCTION The dollar fluctuated but remained rangebound on Thursday as this week’s upward trajectory of U.S. Treasury yields took a breather. Saudi riyal, yuan, Turkish lira, pound, U.S. dollar, euro and Jordanian dinar banknotes are seen in this illustration taken January 6, 2020. While the dollar initially edged lower following the release of disappointing economic data, the greenback reversed its losses after benchmark Treasury yields partially recovered in the wake of a 10-year TIPS auction which showed soft foreign demand for the notes. Against a basket of world currencies, the dollar was last up 0.13%. U.S. 10-year note yields were at 1.8325%, off their two-year high of 1.902% reached on Wednesday. “While yields are softer, they’re still at elevated levels, and the dollar continues to draw support ahead of next week’s Fed meeting,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “We’ve seen ebbs and flows this month, but the underlying fundamentals remain bullish for the dollar on the view that the Fed is going to adopt a more hawkish policy stance going forward.” The benchmark yield’s advance has been driven by market expectations that the U.S. Federal reserve will tighten monetary policy at a faster pace than previously anticipated. Fed funds futures have fully priced in a rate hike in March and a total of four in 2022.