CAPITALDIGEST MARKET REVIEW 9 AUGUST 2021

MONDAY 2/8/2021 – DOLLAR WAVERS ON DOVISH FED TONE, MIXED ECONOMIC OUTLOOK The dollar easedslightly on Monday as markets assessed how tightly to embrace risk following dovish statements from Federal Reserve policy makers last week and mixed economic data. The dollar index , which measures the currency against six major peers, was down less than 0.1% at 92.058 by early afternoon in New York after having been down about 0.2% on the day. The index last week dropped 0.9%, the dollar’s worst week since early May, as it turned away from the previous week’s 3-1/2-month high when traders were positioning for a speedy start of Fed tapering of support for the economy. “The U.S. dollar has begun August with a heavier tone as risk appetites rebuild,” Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note to clients. But the additional risk appetite in the dollar seemed satisfied after U.S. 10-year Treasury yields fell and a stock rally eased on a report in the morning that U.S. manufacturing activity grew in July, but at a slower pace. read more U.S. Treasury bond yields fell to 1.17% early on Monday afternoon from 1.226% on Friday and real yields – adjusted for inflation – reached record lows , . The U.S. manufacturing report reinforced the idea that growth may have peaked. The euro was flat on the day at $1.1867 . It showed little reaction to a Purchasing Managers Index (PMI) reading of July manufacturing that had been seen as a possible mover. The British pound was also little changed at $1.389, ahead of a Bank of England meeting later in the week. [nL1N2P90GH] The recent move away from the dollar hardened after dovish comments from Fed officials indicated that lower interest rates and tapering of support for the economy will probably not come as quickly as markets had begun to expect.   TUESDAY 3/8/2021 – DOLLAR STEADIES AS MARKETS WEIGH ECONOMIC RISKS, CENTRAL BANK MOVES The U.S. dollar steadied on Tuesday, after having lost value against the Japanese yen and Swiss franc, as questions about slowing U.S. economic growth and the COVID-19 Delta variant challenged risk appetite. The U.S. dollar dipped below 109 yen , and for a second day gave up as much as 0.4% before recovering half of the day’s loss to 109.1 yen. It traded against the Swiss franc as much as 0.3% lower and leveled off with a 0.1% decline for the day. The franc also gained against the euro to its greatest value in nine months. “The Swiss franc and the yen are benefiting as rising coronavirus cases cloud the outlook for growth,” said Joe Manimbo, senior market strategist at Western Union Business Solutions. But the moves to the safe haven franc and yen also came alongside reminders that currencies are sensitive to talk from central bankers about pulling back on bond purchases and eventually raising rates as their economies come out of the worst of the coronavirus pandemic. Relatively hawkish comments by central bank officials in Australia and New Zealand on Tuesday led the Australian dollar and the Kiwi dollar to big gains among major currencies. The index that measures the dollar’s strength against a basket of peers was up by a hair to 92.046 at 1902 GMT after declining slightly on Monday. Last week the dollar lost nearly 1% as U.S. Federal Reserve policy makers said they expected it would still be while before job growth allowed them to pull back on support for the economy.   WEDNESDAY 4/8/2021 – STERLING STEADY ABOVE $1.39 BEFORE BANK OF ENGLAND MEETING Sterling steadied around $1.39 against the dollar on Wednesday, buoyed by risk sentiment in markets, optimism over the outlook for COVID-19 in Britain and some anticipation of a hawkish turn from the Bank of England when it meets on Thursday. Britain’s pound has rebounded after most lockdown measures in England were dropped on July 19, reaching $1.3984 at the end of the month. Since then it has stayed mostly above $1.39. “We think UK assets have the potential to be first in, first out when it comes to pricing in Delta variant risks; with the rest of the world now grappling with containing the new strain of the virus, falling new cases and hospitalizations in the UK are a welcome boost to cyclical UK assets,” Viraj Patel, Fx and global macro strategist at Vanda Research, said. The focus is also on the BoE, with the central bank expected to maintain its nearly 900 billion-pound ($1.25 trillion) bond-buying programme, although two policymakers have broken ranks to suggest that the time for tighter monetary policy might be nearing. The BoE is expected to be among the first of the world’s main central banks to begin the process of stopping stimulus support. “On top of a potential hawkish message from the BoE this week, we therefore think that UK gilt yields and GBP have the potential to move higher in the near-term,” Patel said. Overnight implied volatility on the pound increased by 2 points, indicating that traders are bracing for potential swings in the currency around the central bank meeting. Other analysts differed in their views on whether the BoE may signal a shift in its monetary policy stance. “We think meaningful BoE shifts will wait until after unemployment support via the furlough scheme is over so the Bank can get a cleaner read on the labour market,” CitiFX analyst Adam Pickett said in a note to clients.   THURSDAY 5/8/2021 – DOLLAR STEADY EVEN AS YIELDS EDGE UP AHEAD OF U.S. JOBS REPORT The dollar took a breather on Thursday, a day after being given a boost from seemingly hawkish comments by a top Federal Reserve official, as the market awaited new direction from Friday’s U.S. jobs report. The dollar index against major currencies was down 0.03% to 92.249 in the afternoon in New York. On Wednesday, Fed Vice Chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023. “Clarida’s comments are allowing the dollar to stay well supported into the payrolls numbers on Friday,” said ING FX strategists Francesco Pesole and Chris Turner. The greenback, which gained 0.2% on Wednesday, was traded in a relatively tight range through the day, unmoved by new government reports on jobless claims and the trade deficit that came in close to estimates from economists. It also shrugged off another up-day in U.S. stocks and movement in the U.S. Treasury market, where the yield on the 10-year note rose as much as 4 basis points and was last at 1.2152%. “The market has been in a wait-and-see mode until we get past tomorrow’s nonfarm payroll report,” said Ed Moya, senior market analyst at broker OANDA. Friday’s employment report for U.S. employment in July is seen as highly uncertain but critical to Fed policymakers deciding when to begin tapering support for the economy. “If we get an impressive read tomorrow, that would have the market firmly pricing in tapering and allow the yield curve to steepen and provide the dollar with support,” Moya said.   FRIDAY 6/8/2021 – STERLING HOLDS NEAR FOUR-MONTH HIGH VS EURO The pound was steady on Friday, holding close to the four-month high it reached versus the euro on Thursday after the Bank of England set out plans for how it would tighten monetary policy. The central bank’s message was slightly hawkish: the monetary policy committee voted 7-1 to maintain the pace of its government bond-buying, even though it expects inflation to jump to 4.0% around the end of the year. But it also said that “some modest tightening” of monetary policy over its three-year forecast period was likely to be necessary. Because the hawkish shift had been largely expected, sterling did not react significantly to the news. But analysts said that it helped to reinforce its strengthening trend. The British currency has been a strong performer in recent weeks as COVID-19 cases – while still high – have fallen and high vaccination rates have allowed the British government to lift most social-distancing rules. At 0756 GMT on Friday, it was little changed against the dollar at $1.3925, up 0.2% on the week as a whole. Versus the euro, it was flat at 84.95 pence per euro, up around 0.5% on the week as a whole. Earlier in the session, it touched 84.90 pence per euro, which was the pound’s strongest level in four months. The central bank’s messaging “may be a small step for the BoE, but it is a giant leap compared to ECB communication,” wrote ING FX strategists in a client note. “With the BoE’s finger now on the trigger – any better UK data could start to see some outsize reaction in GBP as BoE tightening expectations are brought forward.”