CAPITALDIGEST MARKET REVIEW, 31/10/2022

DOLLAR SELLS OFF ON SPECULATION OF LESS HAWKISH FED, EURO REGAINS PARITY The U.S. dollar sank more than 1% against a basket of peers on Wednesday as weakening economic data firmed views that the Federal Reserve will slow the pace of its rate hiking cycle, sending the euro back above parity with the greenback for the first time in a month. At 3:15 p.m. EDT (1915 GMT), the dollar was down 1.118% at 109.7 against a basket of six currencies, its weakest since Sept. 20. The dollar’s decline came as the benchmark 10-year U.S. Treasury yield continued its descent from last week’s multi-year high of 4.338%, and was last down four basis points at 4.0317%. “Broad dollar weakness and further but milder declines in U.S. Treasury yields than yesterday appear to reflect wishful thinking toward a Fed pivot next week,” said Derek Holt, head of capital markets at Scotia Economics. The aggressive pace of Fed tightening this year, aimed at taming stubbornly high inflation, has turbo-charged the dollar. Traders and economists predict a fourth-straight 75 basis-point interest rate increase next Wednesday, but there is growing speculation that the central bank will slow to half a point in December. FEDWATCH The view that the Fed could begin to pivot in December was reinforced by data on Tuesday that showed U.S. home prices sank in August as surging mortgage rates sapped demand. STERLING HITS SIX-WEEK HIGH AS SUNAK MULLS DELAY TO OCT. 31 BUDGET PLAN Sterling soared to six-week highs on Wednesday, as Britain’s new Prime Minister Rishi Sunak holds his first cabinet meeting amid reports he could delay the announcement of a plan to repair the country’s public finances.Sunak took power on Tuesday with a promise to fix the mistakes of his predecessor and stabilise the economy, warning Britain faced a “profound economic crisis”. Foreign minister James Cleverly said on Wednesday the government’s fiscal plan, scheduled for Oct. 31 and hotly anticipated by markets, could be delayed, suggesting a little more time might be needed to spell out the details.The pound was last up 1.16% against the dollar at $1.1601, and was 0.41% higher versus the euro at 86.500 pence per euro. “Things are certainly starting to look a lot more constructive for the pound,” said Michael Brown, head of market intelligence at Caxton. “PM Sunak coming into office appears to have restored fiscal credibility with the market, removing a large chunk of the risk premium that was previously associated with UK assets,” said Brown. Former prime minister Liz Truss resigned last week following major U-turns on her fiscal plan, which had sent UK gilt markets into chaos and saw the value of the pound plummet to a record low of $1.0327 against the dollar on Sept. 26. The currency has regained almost 13% in value since then, but is still 14% down so far this year against the dollar. DOLLAR RISES AFTER RECENT SELL-OFF, YEN CLIMBS The dollar rose on Thursday, after earlier falling to a one-month low in choppy trading ahead of an expected rate hike from the European Central Bank (ECB). Meanwhile, the yen gained some footing ahead of Friday’s policy decision by the Bank of Japan, rising to 145.11 per dollar, its highest since Oct. 21. The dollar has fallen sharply in recent days as investors have cheered signs that the U.S. Federal Reserve is considering slowing down its aggressive rate hikes in December. The euro on Thursday peaked at a more than one-month high of $1.0094 before reversing course. It was last down 0.13% at $1.0066 ahead of the ECB’s decision. The central bank is expected to raise its deposit rate by 75 basis points (bps) to 1.5%, a 13-year high. It is also likely to reel in a key subsidy to commercial banks. “I think that a bit of profit-taking at this level is not unheard of,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “Since Monday, the euro-dollar has gone up around 2.2%, so we’ve had quite a big move in the dollar over the last two days.” Against a basket of currencies, the dollar was up 0.16% to 109.73, having rebounded after falling to a one-month low of 109.53 earlier on Thursday. STERLING RECOVERY STALLS, STILL SET FOR THIRD STRAIGHT WEEKLY GAIN The British pound slid against the dollar on Friday but was still set for its third consecutive weekly gain, its longest positive streak since February. After hitting a record low against the dollar of $1.0327 in September, the pound has staged a recovery after the formation of a new British government and as the dollar has softened on expectations that the Federal Reserve might begin to slow the pace of monetary tightening. However, that recovery stalled on Friday and by 0933 GMT the pound was down 0.3% against the dollar to $1.15295. For the week, the pound was still up 1.9%, its biggest weekly jump since Sept. 30. Against the euro, the pound was down 0.2% at 86.39 pence. “With Rishi Sunak as prime minister, markets see a safe pair of hands,” said Stuart Cole, head macro economist at Equiti Capital. “Sunak and (finance minister Jeremy) Hunt have injected an element of confidence back into the UK as far as international investors are concerned and sterling has been a beneficiary of that.” However, with the Bank of England (BoE) expected to further hike interest rates while the economy is slowing and with ongoing issues concerning EU trade and the Northern Ireland Protocol, Cole was cautious on the outlook for the pound. FOREX-DOLLAR STRENGTHENS AS FED EXPECTED TO STAY HAWKISH; YEN FRAGILE The dollar firmed on Monday after strong consumer spending data pointed to persistent underlying inflation pressure, cooling bets that the U.S. Federal Reserve could flag a slowdown in its aggressive interest rate hikes. Against the Japanese yen, the greenback was 0.44% higher at 148.08, particularly helped by the Bank of Japan’s (BOJ) decision to keep ultra-low interest rates on Friday, and BOJ Governor Haruhiko Kuroda’s still-dovish comments in the face of rising interest rates elsewhere. The dollar moved broadly higher in early Asia trade, and was up more than 0.2% against the New Zealand dollar and the pound. It recouped some of last week’s losses, after having slid on hopes of a potential Fed change of tack. “Markets have been kind of expecting a Fed pivot on monetary policy. I think that is too premature, given how resilient the economy has been and particularly how high inflation has been,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).