Dollar rise on Fed rate risk

Bonds in Asia declined as speculation U.S. interest rates will be raised as soon as next month underpinned the dollar. Copper and gold fell as shares in the region were mixed. Crude oil rallied.

 

The Bloomberg Dollar Spot Index extended gains at a four-month high, up 0.2 percent by 12:32 p.m. in Tokyo, as yields on 10-year debt from New Zealand to Japan climbed. Oil rose a second day, continuing its recovery from Monday’s rout, while copper resumed losses with gold. The MSCI Asia Pacific Index fluctuated as U.S. index futures rose 0.2 percent after Apple Inc. drove equity losses Tuesday.

 

Traders boosted bets on a September rate hike in the U.S. after Federal Reserve Bank of Atlanta chief Dennis Lockhart said he would only endorse putting it off should there be a significant deterioration in economic data. Oil’s rebound steadied commodity markets, quelling losses among energy and mining stocks ahead of a swag of services industry data from China to Japan and the U.S. Thailand is projected to keep benchmark borrowing costs unchanged at a review Wednesday.

 

“The overseas environment will continue to be a drag on the market,” Hiroichi Nishi, a manager at SMBC Nikko Securities Inc. in Tokyo, said by phone. “Lockhart’s comments made the market wary of rate hikes once again. Caution toward the Chinese economy continues to weigh on the market as well.”

 

Bloomberg’s dollar gauge, which tracks the greenback against 10 major peers, rose a third day, with the currency eking out further gains Wednesday against 12 of 16 major peers. The Malaysian ringgit slid 0.6 percent ahead of trade data, while the Korean won resumed losses, falling 0.7 percent. The Thai baht was down 0.3 percent before the rate decision.

China and Asia on shaky ground as factories step back in July

SYDNEY, Aug 3 (Reuters) – Headwinds for the world’s second-biggest economy intensified at the start of the third quarter, with manufacturing conditions in China deteriorating to their worst in two years in July and triggering fresh slides in global commodity prices.

 

Similar business activity surveys for Taiwan, South Korea and Indonesia – all heavily reliant on Chinese demand – reflected varying degrees of weakness that is clouding hopes for a convincing global recovery in the second half of the year.

 

With Greece’s latest debt squeeze resolved, for now, investors’ focus will shift back to sluggish European growth and whether the U.S. economy has healed enough to withstand its first expected increase in interest rates since 2006.

 

As emerging economies appeared on track to post their smallest share of global growth in years, the hope is for continued recovery in the United States and Britain. Manufacturing surveys for both countries, along with Europe, are due later in the day.

Both U.S. and UK data in recent weeks has been mixed, adding to doubts about whether they are on a sounder and sustainable footing.

 

“We believe the macro environment remains challenging for emerging market assets amid headwinds of low commodity prices, concerns over China and a looming Fed tightening cycle,” Barclays strategists wrote in a daily note in clients.

 

China’s factory activity shrank more than initially estimated in July as new orders fell, dashing hopes that the world’s second-largest economy may be steadying, a private survey showed on Monday.

The final Caixin/Markit China Manufacturing PMI came in at 47.8 in July, from 49.4 in June, sinking deeper below the 50-mark that divides growth from contraction.

A similar official factory survey at the weekend was also weaker than expected, suggesting growth had stalled.

 

Both indicators signalled a slowdown in factory activity at a time when Beijing has been intervening heavily to prevent a full-blown crash in the country’s stock markets.

“My view is that they are distorted numbers due to the stock market panic. If that’s the case, it’s a transitory dip and given the amount of stimulus that has been put in place, we should expect a bounce back in the August numbers,” said ING economist Tim Condon.

 

“But the economy can hardly afford much of a headwind, so probably it brings forward the timing of when people expect the next (policy) move from the authorities.”

China’s central bank has already cut interest rates four times since November and repeatedly loosened restrictions on bank lending in its most aggressive stimulus campaign since the global financial crisis.

 

Analysts at Nomura expect another 50-basis-point cut in banks’ reserve ratio and one more quarter-point easing in interest rates, likely in August.

 

Yet, a senior Chinese central bank official predicted that downward pressure on the economy will persist in the second half of the year, saying growth in infrastructure spending and exports were unlikely to pick up.

 

The frosty state of China saw South Korean exports fall for a seventh month in July, while economic growth in Taiwan cooled to its slowest in three years in the second quarter.

 

China’s slowdown is also forcing Western companies to take a hard look at their businesses, leading many to reduce investments, costs and product lines.

 

“In terms of external demand, loose monetary conditions and lower energy prices should support a pick-up in global activity in the coming quarters,” Krystal Tan, Asian economist at Capital Economics wrote in a report.

 

“However, the pace of recovery is likely to be gradual, suggesting a strong rebound in Asia’s export performance is still some way away.”

 

Providing a bit of relief, manufacturing activity in Japan and India both picked up in July thanks to new orders, though analysts questioned if the momentum can be sustained.

 

Japan’s Manufacturing PMI climbed to a five-month high of 51.2, from 50.1, while India’s Manufacturing PMI rose to a six-month high of 52.7, from 51.3.

 

“While this is a generally positive set of data, upcoming PMI data releases will indicate whether the manufacturing sector can sustain this momentum,” said Pollyanna De Lima, economist at Markit and author of the Indian PMI survey.

Yen Heads for Biggest Two-Day Gain in Three Weeks; Krone Slumps

The yen headed for its biggest two-day advance in three weeks against the dollar as a slump in oil and stocks stoked demand for Japan’s haven assets.

 

The yen climbed to the strongest in nine weeks versus the euro as Greece prepares for an election that the country’s leader said may lead to it exiting the currency union. Norway’s krone slumped to a three-week low as a report showed manufacturing in western Europe’s biggest oil producer shrank. The ruble tumbled as the cost of insuring Russian bonds against default rose to the highest level in almost six years on concern a cut in the nation’s credit rating to junk was imminent.

 

The yen’s gain “is primarily due to the global risk-aversion,” said Alvin T. Tan, a foreign-exchange strategist at Societe Generale SA in London. “Dollar-yen ended the year relatively bid. It’s come off as global equities and bond yields have fallen.” He also pointed to oil prices, “and of course there’s a bit of worry about the Greece thing.”

 

The yen advanced 0.4 percent to 119.18 per dollar as of 7:35 a.m. New York time, extending its gain in the past two days to 1.1 percent, the most since the period ended Dec. 16. Japan’s currency gained 0.8 percent to 141.70 per euro after reaching 141.38, the strongest since Nov. 3. The dollar strengthened 0.4 percent to $1.1889 per euro.

 

Crude oil futures tumbled 5 percent yesterday in New York and slid below $50 for the first time since April 2009. to as low as $48.47 a barrel today. The price fell as much as 3.1 percent more today, set for a fourth day of declines. The MSCI Asia Pacific Index (MXAP) of shares sank 2 percent and the MSCI All-Country World Index slid 0.4 percent, in a fifth day of drops.

Oil ‘Risk’

“We may well see the market entering risk-off mode,” Takeru Kurokawa, an analyst in Tokyo at Ueda Harlow Ltd., which provides margin-trading services, wrote in a note to clients. “Until now, oil price declines were prompting dollar-buying, but now it seems like it’s viewed as a risk.”

 

The yen gained for a third day versus the euro after European Central Bank President Mario Draghi said in an interview with German newspaper Handelsblatt last week that policy makers were ready to act if needed to counter deflation. Greeks head to the polls on Jan. 25 in snap elections triggered after lawmakers failed to choose a president last month.

 

In a Jan. 3 speech in the central city of Larissa, Prime Minister Antonis Samaras said Greece would be driven into default and out of the 19-nation European single currency if the opposition Syriza party wins. Syriza has vowed to increase wages, expand the number of government jobs and persuade the euro area to write off some Greek debt.

Euro-Dollar Forecast

ABN Amro Bank NV cut its year-end forecast for the euro to $1.10 from $1.15 and expects the common currency to drop to parity by the end of 2016, Nick Kounis, the head of macro research based in Amsterdam, wrote in a client note. The performance will be driven by “sluggish” euro-area growth and divergence in monetary policy with the U.S., he wrote.

 

The yen has rallied 5.3 percent in the past month, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.1 percent, while the euro weakened 0.6 percent.

 

Russia’s currency slipped 2.8 percent to 62.6300 to the dollar, adding to a slide of 8 percent yesterday. The ruble tumbled 41 percent against the dollar last year, its worst performance since 1998, when Russia defaulted on local debt.

Krone, Aussie

Norway’s krone dropped 1 percent to 7.7154 per dollar, having depreciated to 7.7619, the weakest since Dec. 16. The currency slumped 0.7 percent to 9.1794 against the euro.

 

A Norwegian purchasing managers’ index fell to 49.8 in December from 51.4 in November,the Association of Logistics and Materials Management and Danske Bank A/S said today. That missed the 50.5 estimate in a survey of economists. A reading below 50 indicates a contraction.

 

Australia’s dollar jumped as people familiar with the matter said China will speed infrastructure projects valued at 7 trillion yuan ($1.13 trillion). It rose versus all except two of its 16 major counterparts as the people familiar with the matter said China’s government had agreed to accelerate 300 infrastructure projects worth 7 trillion yuan this year. China is Australia’s largest trading partner.

The investment will be in seven industries, including oil and gas pipelines, health, clean energy, transportation and mining, according to the people.

 

The Aussie advanced 0.5 percent to 81.27 U.S. cents, set for the biggest one-day gain since Dec. 30, and earlier was 0.9 percent above yesterday’s close, when it ended at 80.35 cents, the weakest since July 2009.

 

Intercontinental Exchange Inc.’s U.S. Dollar Index, which measures the greenback’s performance against major peers, rose 0.3 percent to 91.628 after rising to 91.775 yesterday, the highest level since December 2005.

Euro Slides to Weakest Since 2006 on ECB, Greece

The euro weakened to an almost nine-year low versus the dollar amid investor concern Greece might leave the currency union and on speculation the European Central Bank has moved closer to large-scale sovereign-bond purchases.

 

A gauge of the dollar reached the strongest in nine years with the Federal Reserve moving toward raising interest rates. The yen rose to an eight-week high against the euro as a slide in Asian stocks boosted demand for haven assets. Russia’s ruble tumbled as oil fell. The British pound fell a second day. Volatility jumped to the highest in more than a year.

 

“It’s probable that the euro will go on sinking,” Stephen Lewis, chief economist at ADM Investor Services International Ltd, said by phone from London. “There are very few fundamental factors in its favor. Lurking in the background, there are problems over Greece and therefore questions as to whether the euro zone is going to hold together.”

 

The euro dropped 0.6 percent to $1.1936 as of 10:26 a.m. in New York after sliding to $1.1864, the least since March 2006. The shared currency fell 1.4 percent to 142.68 yen and earlier was at 142.56, the lowest since Nov. 10. The dollar depreciated 0.8 percent to 119.56 yen.

 

The Bloomberg Dollar Spot Index (BCOM), which tracks the U.S. currency against 10 major peers, rose 0.2 percent to 1,143.05 and touched 1,146.49, the highest in data going back to 2005.

Volatility Jumps

JPMorgan Chase & Co.’s Global FX Volatility Index climbed to the highest since September 2013. The gauge rose four basis points to 10.08 percent after earlier reaching 10.27 percent. It has increased from a record-low 5.28 percent set last July.

 

Oil declined for a third day, with Brent crude falling below $55 a barrel for the first time since May 2009, after the Bloomberg Commodity Index slumped 17 percent last year, the worst performance since 2008.

 

The ruble of Russia, the largest energy exporter, decreased 1.3 percent to 59.49 per dollar in Moscow, in its first day of trading of 2015 after a 46 percent decline last year, when it reached a record-low 80.10.

 

The pound slipped to its weakest level in 17 months as data showed construction output in the U.K. slowed more than analysts predicted last month, adding to evidence that the economic recovery is losing momentum.

 

Sterling fell as much as 1 percent to $1.5176, the lowest since August 2013, before being 0.6 percent weaker at $1.5242.

 

South Korea’s won dropped for a third day as BNP Paribas SA said disinflationary pressures were keeping alive the possibility the Bank of Korea will cut interest rates in the first quarter.

 

The won depreciated 0.6 percent to close at 1,109.69 per dollar in Seoul and touched 1,111.70, the weakest level since Dec. 9.

Draghi’s View

The euro slid against most of its major peers after President Mario Draghi said in an interview with German newspaper Handelsblatt published Jan. 2 that policy makers were ready to act if needed to counter deflation.

 

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said. “We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary.”

 

Greece began an election campaign that Prime Minister Antonis Samaras said may lead to an exit from the euro region should the Syriza party win. Der Spiegel magazine reported German Chancellor Angela Merkel considers a Greek exit from the euro to be manageable.

‘Triple Whammy’

Economic data due Jan. 7 was forecast by economists in a Bloomberg survey to show euro-area consumer prices dropped 0.1 percent in December from a year earlier, the first decline since 2009.

 

“There’s a triple whammy of events that look set to trip up the single currency,” Steve Barrow, head of Group of 10 strategy at Standard Bank Plc in London, wrote in a client note today, referring to the inflation report, possible asset purchases by the ECB and a snap election in Greece. The euro will drop to $1.10 in the next 12 months, Barrow said.

 

The euro has fallen 0.7 percent in the past week among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 1.3 percent and the yen rose 2.4 percent.

Source: Bloomberg (05 Jan 2015)

Pound Falls to 17-Month Low as Construction Growth Slows

The pound fell to the weakest level in 17 months against the dollar as a report showed U.K. construction slowed in December more than economists forecast, undermining Britain’s recovery.

 

Sterling declined versus all but two of its 16 major peers as British politicians began their campaigns before parliamentary elections set to take place in May. A survey of polling experts in the Independent on Sunday newspaper found all who made a prediction saw another hung Parliament, where no party has a majority. U.K. government bonds climbed for a fifth day even as the nation prepared to auction 10-year debt tomorrow, the first gilt sale since Dec. 11.

 

“The data has been deteriorating steadily,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London. “The market has been able to focus on the political risks relating to the election as well. We see cable at $1.49 in three months which already is looking quite conservative,” he said, referring to the pound-dollar exchange rate.

 

Sterling fell 0.6 percent to $1.5231 at 3:32 p.m. London time after touching $1.5176, the lowest since August 2013. It was little changed at 78.35 pence per euro.

 

Bank of New York’s Mellor predicts the pound will weaken to $1.40 by year end. The median prediction of analysts surveyed by Bloomberg is for sterling to rise to $1.55.

 

A gauge of U.K. construction declined to 57.6 in December from 59.4 a month earlier, according to Markit Economics. That’s below the median estimate of 59 in a Bloomberg News survey of analysts and above the 50 level that indicates expansion.

Sterling ‘Vulnerable’

The construction data “adds to nervousness surrounding the pound,” BNP Paribas SA analysts led by Steven Saywell in London wrote in a note to clients. “In the short term, GBP appears vulnerable to further weakness especially versus a resurgent USD,” they wrote, referring to the pound and dollar.

 

The Debt Management Office plans to sell 2.75 billion pounds of benchmark gilts tomorrow and 950 million pounds of inflation-linked debt due in March 2044 a day later.

 

“We’ve got two auctions this week after a three-week hiatus in supply,” said Jason Simpson, a U.K. rates strategist at Societe Generale SA in London. “Into year-end, one of the reasons yields squeezed down so low was just this environment of limited issuance.”

 

The 10-year gilt yield fell four basis points, or 0.04 percentage point, to 1.67 percent today, and touched 1.666 percent, the lowest level since May 2013. The 2.75 percent bond due in September 2024 rose 0.4, or 4 pounds per 1,000 pound face amount, to 109.56.

 

The rate on 10-year gilts will climb to 2.75 percent by the end of this year, according to the median of estimates compiled by Bloomberg.

 

U.K. sovereign debt returned 15 percent last year, outperforming U.S. and German securities, according to Bloomberg World Bond Indexes, as investors pushed back bets of higher interest rates by the Bank of England and growth stalled in the euro area.

Source: Bloomberg (05 Jan 2015)

Euro Drops to 4 1/2-Year Low as ECB Splits From Fed; Ruble Sinks

The euro slumped to the lowest in 4 1/2 years against the U.S. dollar after the European Central Bank signaled it will embark on large-scale government-bond purchases as the Federal Reserve moves closer to raising interest rates.

The 19-nation common currency slid for a third week after ECB President Mario Draghi said he can’t rule out deflation in the euro area. The yen also declined for a third week. The ruble plummeted 9.4 percent to lead emerging-market peers lower. The dollar advanced gained against all of its 16 major peers before a report next week that may show the jobless rate fell to a 6 1/2-year low.

 

“The U.S. labor market is performing well and the unemployment rate is falling further,” Ralf Umlauf, head of research for Helaba Landesbank Hessen-Thueringen in Frankfurt, said by phone yesterday. “In the euro zone, it’s a completely different picture. We have still very high unemployment rates near the historical top. So that’s the reason why we have the divergence in monetary policies.”

 

The euro dropped 1.5 percent last week to $1.2002 yesterday in New York after falling to $1.2001, the lowest since June 2010. The shared currency lost 1.3 percent against the yen to 144.63. Japan’s currency traded at 120.28 per dollar.

 

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.9 percent in the week to 1,141.02. It increased 11 percent last year, the biggest gain in data going back to 2005.

Looking Ahead

The dollar gained against all of its 31 major counterparts in 2014 for the first time in data going back to 1989, buoyed by an improving economy. Strategists don’t see a repeat of that dominance in 2015.

More than half of those counterparts are forecast to gain next year against the greenback, led by this year’s biggest loser, Russia’s ruble. It is predicted to add 17 percent after plunging 46 percent in 2014 under the pressure of sliding oil prices and U.S. and European economic sanctions against Russia for its role in Ukraine turmoil.

 

Mexico’s peso is projected to gain 9.9 percent after a losing 12 percent last year, and the Norwegian krone may add 4.6 percent after a 19 percent tumble.

 

Argentina’s peso is forecast to be the biggest loser in 2015, dropping another 29 percent after last year’s 23 percent descent.

 

The euro is projected to fall 1.7 percent and the yen 3.6 percent after each dropped 12 percent in 2015.

Lower Euro

The shared currency slumped 2.8 percent in December for a sixth straight month of losses, its longest skid since 2010.

“Those who are subtly encouraging the lower euro, they won’t be satisfied yet,” Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said by phone yesterday. The extent of euro weakness “really does come down to the composition and size of this sovereign QE that they’re talking about,” he said.

 

Draghi seldom gives interviews and his comments to the German newspaper Handelsblatt reflect a drive to win over that nation. Policy makers there have led criticism of quantitative easing, saying it threatens financial stability, reduces the incentive for governments to restructure their economies, and is legally tricky.

 

“The risk cannot be entirely excluded, but it is limited,” Draghi said when asked if the region could enter a spiral of declining prices, falling wages and postponed spending. “We have to act against such risk.”

Japan Easing

Policy makers in Japan have also embraced monetary stimulus to ward off deflation, prompting the yen to fall for a third consecutive year against dollar in 2014.

 

The foreign-exchange market is bracing for more yen-debasing stimulus measures from the Bank of Japan after the nation slipped into a recession last quarter. The BOJ can employ new measures to reach its 2 percent inflation goal in the 2015 year, Governor Haruhiko Kuroda said in an interview with the Mainichi newspaper.

 

The dollar gained as economists surveyed by Bloomberg forecast forecast the U.S. unemployment rate fell to 5.7 percent in December, the lowest since June 2008, before the Labor Department report on Jan. 9. Employers added 240,000 jobs, economists projected.

 

The Fed said it will be patient on the timing of the first interest-rate increase since 2006 and raised its assessment of the labor market at the last meeting of its Open Market Committee on Dec. 17. The FOMC’s next scheduled decisions are Jan. 28, March 18 and April 29.

 

Fed funds futures show a 63 percent probability that the central bank will raise rates by September, up from a 45 percent likelihood at the end of November.

 

Analysts at BNP Paribas SA recommended buying the dollar and selling the euro and yen in a note yesterday.

 

“With U.S. economic outperformance keeping U.S. yields and the U.S. dollar supported, investors’ question at the start of the year should not be whether to buy the USD, but which currency to sell against it,” the bank said.

 

Source: Bloomberg (03 Jan 2015)