CAPITALDIGEST MARKET REVIEW, 28/11/2022

STERLING TICKS UP, ECONOMIC ACTIVITY SLOWS BY LESS THAN EXPECTED Sterling ticked up on Wednesday, rising for a second day against a faltering U.S. dollar after preliminary British economic activity data beat expectations, though it still showed contraction was underway.  Flash purchasing manager index (PMI) data on Wednesday showed British economic activity sticking near 21-month lows, adding to signs of recession as orders sank and employment growth slowed. Despite the latest PMI readings remaining below 50 – the threshold for contraction – the data was slightly better than economists polled by Reuters had expected, leading to a slightly firmer pound. At 1015 GMT, the pound was up 0.2% against the dollar at $1.1909, and up 0.17% versus the euro at 86.49 pence. “It’s probably slightly improving the economic backdrop narrative for the pound, but I doubt that it’s PMIs that are actually going to tell us a lot about the economy at the moment in the UK or the euro zone” said Francesco Pesole, FX strategist at ING. He pointed out that a rough winter lies ahead, given the onset of recession and soaring energy costs. The Organisation for Economic Cooperation and Development said on Tuesday that Britain’s economy was set to lag major peers in 2023. Data on Tuesday showed UK government borrowing was less than expected in October although the budget deficit is likely to balloon in the months ahead thanks to energy bill support measures and a slowing economy.”The UK still has a large structural budget deficit and large current account deficit, and is reliant on foreign capital to balance payments,” said Adam Cole, head of FX strategy at RBC Capital Markets. DOLLAR DOWN AS FED MINUTES, U.S. DATA WEIGHS he U.S. dollar fell across the board on Wednesday, after data showed U.S. business activity weakened further in November and as traders remained on edge ahead of the impending release of minutes from the Federal Reserve’s November meeting. “Fed minutes will be the focus for today,” said Brad Bechtel, global head of FX at Jefferies. “This is the meeting where Powell had a relatively hawkish press conference in which he indicated that if there had been an SEP (Summary of Economic Projections) at this meeting they would have definitely come out with a higher terminal rate. So the meeting minutes are likely to get into detail around this concept and therefore come with a hawkish bent,” Bechtel said. After a headlong rush this year to raise interest rates, the Fed switched this month to a more nuanced approach that was seen as a compromise between officials most concerned about high inflation and others worried that more large rises in borrowing costs might crater the economy or stress key markets. STERLING STAYS NEAR 3-MONTH HIGH AGAINST FALTERING DOLLAR Sterling rose on Thursday, staying near a three-month high against a faltering U.S. dollar, despite the prospect of a difficult winter ahead in the UK due to a cost-of-living crisis and soaring interest rates. At 1022 GMT, the pound was up 0.4% against the dollar at $1.2095. It earlier hit $1.2113, the highest level since August 17. Sterling was up 0.2% versus the euro at 86.10 pence. A weaker dollar was largely behind the pound’s upward move according to analysts, as investors placed bets on riskier assets as minutes from the last Federal Reserve meeting raised the prospect of slower U.S. interest rate hikes. Wednesday’s news that the Scottish government cannot hold a second referendum on independence next year without approval from the British parliament appears to have had little impact on the UK currency. “In the current circumstances – where the UK state looks fragile in the wake of the disastrous Truss administration – then perhaps some of yesterday’s GBP gains can be attributed to relief that politicians will concentrate on running the country rather than faffing around with institutional arrangements,” said Mizuho senior economist Colin Asher. The vote came after a data-heavy week for the UK, with flash purchasing manager index (PMI) data on Wednesday showing British economic activity staying near 21-month lows, though the figures were slightly better than economists polled by Reuters had expected, supporting this week’s rally in the pound. DOLLAR HOVERS NEAR THREE-MONTH LOW AMID BETS FED WILL SLOW HIKES The U.S. dollar edged up on Friday but stayed near a three-month low and on track for a weekly loss as the prospect of the Federal Reserve slowing monetary policy tightening as soon as December preoccupied investors. The euro was set for weekly gains with the GfK institute survey bringing some relief, showing on Friday that German consumer sentiment is expected to stabilise next month with the help of energy measures. Risk-sensitive sterling was near a three-month high against the U.S. currency. “We’ve still got the third successive day of positive risk sentiment … I think that is keeping the U.S. dollar subdued pretty much across the board,” said Ray Attrill, head of FX strategy at National Australia Bank. Against a basket of currencies, the U.S. dollar index stood at 106.06, edging up 0.2% on the day, after thin trading on Thursday due to the U.S. Thanksgiving holiday. Minutes from the Fed’s November meeting released earlier this week showed that a “substantial majority” of policymakers agreed it would soon be appropriate to slow the pace of interest rate rises. Those remarks sent the dollar tumbling as the Fed’s aggressive rate increases and market expectations of how high the central bank could take them has been a big driver of the currency’s 10% surge this year. DOLLAR RISES, YUAN SLUMPS AS CHINA’S COVID UNREST SPOOKS MARKETS The dollar climbed on Monday as protests in China against the government’s anti-COVID policies made investors turn away from riskier assets, and consigned the Chinese yuan to a more than two-week low against the safe-haven greenback, APA reports citing Reuters. The protests have flared across China and spread to several cities in the wake of an apartment fire that killed 10 people in Urumqi in the country’s far west. Hundreds of demonstrators and police clashed in Shanghai on Sunday night. Investors were worried over how the government in Beijing would react to the the wave of civil disobedience when COVID cases are rising. “We’re really looking at the government response to what’s happening … the government response is so unpredictable, and of course that just means derisking,” said Chris Weston, head of research at Pepperstone.The offshore yuan fell to an over two-week low in Asian trading, and was last roughly 0.4% lower at 7.2242 per dollar. The Australian dollar , often used as a liquid proxy for the yuan, slid more than 1% to $0.6681. The kiwi fell 0.72% to $0.6202. China’s stringent COVID restrictions have taken a heavy toll on its economy, and authorities have implemented various measures to revive growth. On Friday, the People’s Bank of China (PBOC), the nation’s central bank, said it would cut the reserve requirement ratio (RRR) for banks by 25 basis points (bps), effective from Dec. 5.