CAPITALDIGEST MARKET REVIEW, 29/07/2024

DOLLAR FALLS, SHORT YEN TRADES SQUARED AHEAD OF BOJ AND FED MEETINGS

The dollar fell to its lowest in more than two months against the yen on Wednesday as short-yen carry trades were unwound ahead of next week’s Bank of Japan meeting, with investors girding for a hawkish monetary officials to tighten policy. The yen also rose to its highest since mid-May against the euro amid expectations that yield differentials that have made it costly for foreign investors to hold yen securities will narrow. The dollar index , which measures the greenback against a basket of six currencies, including the yen and the euro, fell 0.12% to 104.35. It pared losses a bit after S&P Global said that its flash U.S. Composite PMI Output Index tracking the manufacturing and services sectors edged up to 55.0 this month, the highest level since April 2022. “We’re just looking at concerns over global growth and we’re going to see through the rest of this week if that’s going to continue, if the U.S. is going to fare differently,” said Helen Given, associate director of trading at Monex USA, in Washington DC, highlighting China’s surprise rate cuts this week as a catalyst for those worries. “PMIs for U.S. this morning were fairly positive, but not blowing anything out of the water,” she continued. The main macro news of the week comes Thursday, with the first estimate of U.S. second quarter GDP, and Friday, with the Personal Consumption Expenditures Price Index, which the Federal Reserve relies on to gauge inflation.

 CANADIAN DOLLAR HITS 8-MONTH LOW ON DOVISH BANK OF CANADA

The Canadian dollar weakened to an eight-month low against its U.S. counterpart on Thursday as investors grew confident the Bank of Canada would continue to ease policy following its latest interest rate cut the day before. The loonie was trading 0.1% lower at 1.3815 per U.S. dollar, or 72.39 U.S. cents, after touching its weakest intraday level since Nov. 10 at 1.3848. “The market thinks that the Bank of Canada delivered a dovish cut,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC. “The market feels more confident after the meeting that there will be another cut in September.” The Bank of Canada is shifting its focus to boosting the economy rather than suppressing inflation, which raises prospects of further interest rate cuts in the coming months, analysts say. Investors see a roughly 60% chance the BoC will cut rates again at its next policy decision in September after the central bank on Wednesday lowered its policy rate by 25 basis points for a second time in two months to 4.50%. Unwinding of short yen positions have also weighed on the loonie in recent days, Chandler said, adding that a popular trade for hedge funds has been to short the yen and go long on higher yielding currencies such as the loonie, as well as the Australian and New Zealand dollars . The price of oil , one of Canada’s major exports, rose after stronger-than-expected U.S. economic data stoked expectations for higher crude demand. U.S. crude oil futures were up 1% at $78.35 a barrel.

STERLING TIPTOES HIGHER AFTER TURBULENT WEEK

The pound rose on Friday but was still headed for a second consecutive weekly fall against the dollar after a week of turmoil across global markets hit higher-yielding assets and as investors switch focus to next week’s Bank of England meeting. The pound, which hit one-year highs last week above $1.31, is heading for a 0.5% decline against the dollar this week. It’s still on track for a gain of 1.6% this month and remains this year’s top-performing G10 currency against the dollar, with a 1.1% rise, compared with runner-up the euro , which is down 1.67% against the dollar this year. But the recent swell of volatility across markets has hit the pound harder than currencies that are lower yielding, such as the yen or the Swiss franc. Sterling was up 0.14% on the day at $1.28685. Futures traders currently hold the biggest bullish bet on sterling in history, according to weekly data from the U.S. markets regulator . Speculators currently hold a net long position worth $10.77 billion that has almost trebled since the start of this month. In an environment such as the one this week, when currencies with lower interest rates tend to perform better, sterling has come under pressure. Broker IG notes that its proprietary retail trader data, opens new tab shows just 37.63% of traders are net-long, with a ratio of 1.66 short traders for every long trader.

DOLLAR TREADS WATER AFTER TAME US INFLATION REPORT, YEN RALLY STALLS

The dollar ended little changed on Friday, pressured by a fall in Treasury yields after a tame U.S. inflation report that investors said kept the runway for the expected September Federal Reserve easing clear. The Commerce Department’s June personal consumption expenditures (PCE) price index nudged up 0.1%, as expected, after being unchanged in May, underscoring an improving inflation environment. Year over year, the PCE price index climbed 2.5% after rising 2.6% in May, also in line with forecasts by economists polled by Reuters. The Fed closely tracks the PCE price measures for monetary policy, and subsiding inflation pressures could help officials who are meeting next week gain confidence that inflation is moving toward the U.S. central bank’s 2% target. Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, said that PCE data released a day earlier alongside a surprisingly strong 2.8% growth rate reading on second quarter GDP prompted last minute anxiety about hotter monthly data. So the rise reported Friday was a relief compared to Thursday’s number showing core PCE prices rising at a 2.9% rate. “The number was good enough,” Englander said. “It wasn’t a home run but compared to yesterday markets said ‘yep nothing to worry about here, it doesn’t really derail September and they (the Fed) weren’t going to cut in July anyway. So life goes on.'”

SOUTH AFRICAN RAND EDGES HIGHER WITH EYES ON FED

South Africa’s rand edged higher early on Monday, as risk sentiment remained positive ahead of the U.S. Federal Reserve’s policy decision later in the week. At 0716 GMT, the rand traded at 18.27 against the dollar , 0.14% stronger than its previous close. Emerging market currencies like the rand will look at the Fed’s decision on Wednesday for further direction, analysts said. “The Fed is expected to keep rates on hold but markets are looking for a more dovish outlook going forward,” said Andre Cilliers, currency strategist at TreasuryONE. Domestic investors are also awaiting South Africa’s June trade and budget balance figures due this week. South African Reserve Bank data earlier showed South Africa’s June M3 money supply growth was at 4.19% and credit growth at 4.27% year-on-year. M3 is a measure of money supply released by the central bank, which includes all currency in circulation, bank deposits and debt securities, among others.On the stock market, the Top-40 (.JTOPI), opens new   tab index was up 0.4% in early trade. South Africa’s benchmark 2030 government bond was marginally stronger, with the yield down 1.7 basis points to 9.46%.