Sterling Shines as the Dollar Retreats ??

PERSPECTIVE

Sterling shines as the Dollar retreats. The US Dollar posted its worst week since December last week and gave up most of its gains at the start of 2024. Clear signs of weakening economic activity in the US have now been backed up by a softening in the labour market evident in February’s payrolls report. Besides a few exceptions, such as Turkey and Egypt, currencies have rallied against the dollar in the past week, with one currency in particular making headlines. The Great British Pound is the only major world currency to have appreciated against the dollar year to date, despite the UK economy slipping into a technical recession in late 2023. Inflation remains high in the UK, leading to market expectations of elevated interest rates in 2024. A rebound in economic activity and a still very tight job market has helped push sterling to levels last seen in July 2023. If data continues in the same vein, we could well finally see a divergence between the BoE and the FED/ECB. Both the FED and ECB have hinted at imminent rate cuts in Q2, but the BoE may not have that luxury if price pressures remain elevated.

US DOLLAR

• In the past week, we saw the US Dollar index depreciate by 1.1% against a trade-weighted basket of its peers, representing the sharpest weekly decline since December.
• Data early in the week showed strong services sector expansion, which was offset by a weak factory orders print for January, showing a 3.6% monthly decline.
• The major news of the week was the monthly payrolls report for February, The February payrolls figure came above forecasts at 275k, but job gains in both January and December were revised sharply lower. The unemployment rate unexpectedly increased to 3.9% and wage growth slowed much more than anticipated. The labour market is now showing signs of cooling, reinforcing bets the Fed is close to cutting interest rates. Investors are currently assigning a nearly 75% chance of a reduction in the Fed funds rate in June.
• These market forecasts for rate cuts were largely backed up by comments made by FED Chair Powell in his annual testimony to Congress. Chair Powell told Congress the Fed still needs to become more confident that inflation is moving sustainably at 2% before cutting rates, although it is not far from this target.
• Tuesday’s inflation data for February will provide markets with a key metric for FED futures forecasts ahead of the FOMC monetary policy meeting later this month. The core reading will be of particular interest, as this still hovers a touch below the 4% mark.?

ASIA-PACIFIC

• In China, we saw the Renminbi appreciate slightly against USD to end the week trading at 7.185. Data was positive in the past week for the world’s second largest economy. Services activity showed welcome expansion along with upside surprises in both imports/exports trade data. Saturday’s inflation overshoot for February was welcome news after a deflationary period heightened fears of stagflation. There are still a number of clouds surrounding the economy, but these green shoots of recovery are positive signs for now. The government’s announcement of an aggressive 5% economic growth target appears to have boosted confidence in the sense that markets expect the government to do what it takes to hit this target.
• The Yen posted a 2.3% gain against USD last week to end the week trading below 147 for the first time since early February. An overshoot in inflation, along with further services sector strength helped support the Yen earlier in the week. Weak household spending data on Friday showed the vulnerabilities that still exist in the domestic market, but stronger reports of an impending shift to positive interest rates in April helped boost the Yen against a weaker Dollar.
• The Australian Dollar appreciated sharply against its US counterpart last week, ending the week trading 1.5% stronger at 0.662. A strong services PMI was followed up by weak manufacturing/construction data - albeit stronger than forecast. Modestly positive GDP growth figures for Q4 meant the economy avoided a technical recession. The major reason for strength in the Aussie Dollar, however, was positive data finally coming out of China and a broadly weaker dollar to end a torrid period of AUD depreciation since the turn of the year. The future direction is uncertain and will likely be driven by data releases out of the US and China in coming weeks.

SOUTH ASIA

• INR strengthened, once again, last week by 0.15% to end the week trading at 82.7 against USD, a 6-month high. A stellar services activity PMI print helped strengthen the Rupee once again. Recent economic performance and a hawkish RBI have bolstered foreign interest in Indian government bonds and this, in turn, has strengthened the currency.
• PKR ended the week trading flat against USD a touch below 280. The only data release of note showed weak balance of trade, albeit beating forecasts. Incoming prime minister, Shabaz Sharif, will be looking to consolidate power and promote domestic calm after a tumultuous period surrounding the general election. This is unlikely to be easy.

MIDDLE EAST AND AFRICA

• The Nigerian Naira dropped to 1593 against USD last week as volatility in the currency continues. Foreign exchange inflows to Nigeria rose to $2.3 billion in February, the central bank said on Friday, fuelled by renewed interest from foreign investors aided by higher interest rates instituted to defend the currency and a rise in overseas remittances. Africa's largest economy has been experiencing crippling dollar shortages that have pushed its Naira currency to record lows. Recent monetary policy changes have been put in place to address the issue of dollar shortages which have caused short term pain for consumers as the price of goods has skyrocketed due to a weaker Naira. Food inflation in the coming week is expected to sit at 36% year over year.
• The Kenyan Shilling traded appreciated once more last week by over 3% against a weaker dollar. The Shilling appreciated below 142 against USD for the first time since July 2023 as it continues its strong start to the year. There were no data releases of note last week as the Shilling benefited from Kenya meeting its recent debt obligations and a broadly weaker dollar. It is beginning to seem possible that Kenya has turned a corner, but a longer run of data is needed to be sure.
• South African Rand ended the week trading 2% against USD at 18.6. Data was largely unflattering with Q4 GDP growth at just 0.1% and a drop in business confidence. The Rand largely gained due to a weaker dollar and strong emerging market flows.

EUROPE

• GBP ended the week trading a touch above 1.285 against USD, representing a weekly appreciation of 1.6%. Sterling is the only major developed world currency to strengthen against the dollar over the course of 2024 so far, thanks to economic data beating expectations after having slipped into a technical recession in Q4 last year and markets anticipating that the UK will need to keep interest rates higher for longer compared to peers due to stickier inflation. Strong economic activity PMIs and a jump in house prices helped support sterling in the past week against a weak dollar following the monthly payrolls report. The UK has its own labour data release this week, which will give markets an early signal for what to expect in the upcoming monetary policy meetings in March and May. With inflation remaining sticky in the UK, it can be expected the central bank will be rather more hawkish compared to its European and American counterparts.
• The Euro ended the week trading against USD at 1.094, after a third consecutive week of appreciation against the dollar. Data out of the Eurozone was disappointing in the most part over the past week. Retail Sales and activity PMIs showed no growth and indeed the HCOB Construction PMI marked its 24th consecutive month of contraction. The ECB held rates at 4% as expected on Wednesday with Christine Lagarde striking a far more dovish tone in her press conference following the monetary policy meeting. After revising inflation expectations downwards, she hinted that a rate cut in June may be appropriate as long as data meets expectations in April and May. The Eurozone is certainly in the midst of a tough period of economic slowdown and will be keen to loosen monetary policy once the inflation outlook improves nearer to their 2% target. In the past week, however, the common currency managed to benefit from a weaker dollar.

OTHER NEWS

• Egypt secured a deal to more than double its IMF bailout to $8bn after the country allowed its currency to drop to a record low against the US dollar, unlocking support to avert its worst economic crisis in decades. The fund said on Wednesday that Cairo had taken “decisive steps to move towards a credible flexible exchange rate regime” after Egypt’s central bank devalued the pound by 40 per cent and massively raised interest rates to relieve a foreign currency shortage. The need to avoid unrest in a key Western ally at a time of geopolitical tension in the region will not be absent from policymakers deliberations on economic assistance.
• Turkish Lira’s losses this week are putting Turkey’s currency on course for its worst weekly performance since July 2021 as higher-than-expected inflation, combined with concerns over dwindling reserves, weigh on the currency. The volatility is expected to remain high this month in the runup to local elections. The Turkish currency weakened 0.2% on Friday to 31.95 against the US dollar, extending this week’s losses to 1.9%.

PERFORMANCES AGAINST US DOLLAR