Dollar calm as investors eye US jobs report, election

British Pound

Reuters: The pound fell on Thursday, set for its worst two-day loss against the euro in two years, a day after new British finance minister Rachel Reeves announced a tax-and-spend budget that investors worried would reignite inflation and weigh on growth. Sterling was heading for a two-day loss of 0.7% against the euro, the largest since September 2022, when then-Prime Minister Liz Truss unleashed turmoil on UK financial markets with budget plans for billions of pounds in unfunded tax cuts.

Reeves' budget on Wednesday contained the biggest tax increases since 1993 as she sought to repair Britain's public services, and she also changed the government's fiscal rules to increase borrowing for long-term investment to boost the economy. Giving the euro an extra boost against the pound was data on Wednesday that showed a surprise pick-up in the German economy, which has flatlined for months, while the dollar got a lift from yet more evidence on Thursday of the strength of the U.S. economy.

“A lot of news over the last day or two from Europe and the U.S. and so it’s perhaps more difficult to remove just the UK effect from that, so it makes the movements a little more opaque," Rabobank currency strategist Jane Foley said. "But we can certainly see that this budget has had a large effect," she said. The Office for Budget Responsibility, whose forecasts underpin British government budgets, now expects inflation will average 2.6% next year, compared with a previous 1.5% forecast.

A sell-off in UK government bonds accelerated on Thursday, sending two-year gilt yields up by over 20 basis points to their highest since May. Money markets see an 80% chance that the BoE will cut interest rates by 25 basis points at its Nov. 7 meeting, but traders are now betting on fewer than four rate cuts over the next year from nearly five quarter-point reductions before the budget. Against the dollar, sterling fell 0.7% on the day to $1.28715. The euro was up 0.75% against the pound at 84.39 pence.

Reeves said her Labour government had more plans to boost the economy and she hoped to not have to hike taxes again. "This was a big fiscal event – and the headroom for more is narrow," Bruna Skarica, chief UK economist at Morgan Stanley said. "In net terms, the event was a bit more BoE-hawkish than we expected, but the scale of the market reaction post the release of the OBR's EFO seems a bit excessive to us."

US Dollar

Reuters: The dollar steadied against major peers on Friday, as investors awaited the U.S. jobs report to confirm economic resiliency heading into the Federal Reserve's monetary policy meeting and a close-call U.S. presidential election next week. The yen held onto Thursday's gains as investors continued to digest a less dovish message from the Bank of Japan in the previous session. The U.S. dollar started the month off at a lower level after coming under pressure against the yen and on Thursday.

But the greenback's monthly gains in October were the biggest since September 2022, as investors pared back aggressive Fed rate cut bets and weighed the U.S. election outlook. U.S. nonfarm payrolls data closes out the week, with economists polled by Reuters estimating 113,000 jobs were added in October, although analysts say the number could be impacted by recent hurricanes. That's likely to make the October jobs report "incredibly hard to read," Tapas Strickland, head of market economics at National Australia Bank, wrote in a note.

The unemployment rate, expected to come in at 4.1%, may offer a clearer picture of labour markets. "Such an outcome would likely see the unemployment rate coming in well below the FOMC's September projections of the unemployment rate lifting to 4.4% in Q4 2024. And thus continue to question the need for rate cuts," Strickland said. Data overnight suggested upward price pressures continue to ease, adding to a trend of upbeat data and supporting bets that the Fed will cut interest rates by 25 basis points next week.

The dollar index, which measures the greenback against six major currencies, last rose 0.06% to 103.94. The yen was down 0.11% at 152.18 per dollar. On Thursday, Japan's central bank maintained ultra-low interest rates but said risks around the U.S. economy were somewhat subsiding, signalling that conditions are falling into place to raise interest rates again. "We think the chances of a Dec. rate hike have somewhat increased after Gov. Kazuo Ueda's press conference," Morgan Stanley MUFG economists Takeshi Yamaguchi and Masayuki Inui wrote in a report on Thursday.

Their base case remains for the BOJ to raise rates again in January to 0.5%, although they noted factors such as the dollar/yen exchange rate and inflation data leading up to the year-end decision will be important. The euro stood around a two-week high against the greenback, buoyed this week after data showed euro zone inflation accelerated more than expected in October. It was last down 0.04% at $1.0879. Sterling remained on the back foot, down 0.03% to $1.28955, as investors continued to react after British Finance Minister Rachel Reeves launched the biggest tax increases since 1993 in her first budget. The pound slid to its lowest since mid-August at $1.28445 on Thursday.

The Fed's monetary policy decision next week comes just days after the U.S. presidential election on Tuesday. Republican candidate Donald Trump and Democratic Vice President Kamala Harris remain neck and neck in several polls, but some investors have been putting on trades betting Trump will win, lifting the dollar and U.S. Treasury yields. Trump's pledges to implement tax cuts, loosen financial regulations and raise tariffs are seen as inflationary and could slow the Fed in its policy easing path.

Elsewhere, China's manufacturing activity swung back to growth in October as an expansion in new orders led to a pickup in production growth, a private sector survey showed on Friday. Separate data showed prices of new homes in China rose at a faster pace in October. The offshore yuan traded at 7.1299 yuan per dollar. In cryptocurrencies, bitcoin, the world's largest cryptocurrency by market cap, last fetched around $69,130.

South African Rand

Reuters: South Africa's rand was broadly steady on Thursday following the release of local producer inflation and trade balance data, a day after the finance minister delivered the mid-term budget. At 1507 GMT, the rand traded at 17.6725 against the U.S. dollar, not far from its previous close. The dollar last traded about 0.07% stronger against a basket of currencies. Statistics South Africa earlier said the country's producer inflation fell to 1.0% year on year in September from 2.8% in August, while revenue service figures showed a trade surplus of 12.84 billion rand ($727 million) last month.

Finance Minister Enoch Godongwana's medium-term budget policy statement on Wednesday showed that wider budget deficits and higher debt are expected in South Africa over the next three years. "The rand initially lost some ground post-MTBPS, but this reaction was largely overshadowed by a stronger dollar," said Andre Cilliers, currency strategist at TreasuryONE. "The currency remains sensitive to global dollar movements and domestic fiscal signals," Cilliers added. On the stock market, the Top-40 index closed about 1.7% lower. South Africa's benchmark 2030 government bond was weaker, with the yield up 3 basis points to 9.315%.

Global Markets

Reuters: Asian markets started a likely momentous month on the cautious side, with shares mostly lower and Treasury yields near three-month highs on Friday, while investors wait for U.S. payrolls data, although a rate cut next week is largely baked in. Investors are awaiting Friday's nonfarm payrolls report, ahead of Tuesday's U.S. presidential election and Federal Reserve's policy meeting a day later. Oil extended its rally, with Brent prices up almost 2% to $74.13 a barrel, on reports that Iran was preparing a retaliatory strike on Israel from Iraqi territory in the coming days.

After a sell-off overnight, Nasdaq futures rose 0.3% thanks to a 5.3% jump in Amazon after the bell, which added $104 billion in its market cap. The tech giant posted third-quarter profit above Wall Street estimates, helped by favourable retail sales. The embattled Intel also surprised with upbeat revenue projections, sending its shares up 7% after the close. In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.3% and was down 1.9% for the week.

Tokyo's Nikkei tab fell 2.1% as a stronger yen clouded the outlook for Japanese exporters. The yen held at 152.06 per dollar, having rallied about 1% overnight as less dovish comments from the Bank of Japan Governor Kazuo Ueda kept the door open for a year-end rate hike. China's blue chips inched 0.1% higher while Hong Kong's Hang Seng index rose 0.4% after a private survey showed China's factory activity returned to expansion in October. Overnight, shares of Facebook owner Meta Platforms fell 4% and Microsoft sank 6%, despite both companies beating earnings estimates. Investors were concerned that growing artificial intelligence could hit their profits.

Barring a major surprise in the U.S. payrolls report, a quarter-point rate cut by the Fed is 94% priced in after data showed U.S. consumption remained healthy and inflation gauges point to abating price pressures. Economists expect the U.S. economy added 113,000 jobs in October, although risks are skewed to the upside given the private sector survey pointed to strong job gains and jobless claims were lower than expected. Goldman Sachs, however, expect just 95,000 new jobs in October, while TD Securities also forecast just a 70,000 increase.

"Hurricanes and the Boeing strike are the name of the game in October, and we expect this combination of shocks to heavily distort this month's jobs figures. Underlying this, though, high-frequency data was already pointing to a slower month of hiring than September," analysts at TD Securities said in a note. In the foreign exchange market, the pound was pinned near 2-1/2 month lows of $1.2891 and British bond yields jumped as investors judged the UK government's new budget would boost inflation and cause the Bank of England to cut interest rates more slowly.

Treasury yields hovered near three-month highs. The two-year yields have risen 7 basis points this week to 4.1702%, just a touch below their three-month high of 4.2180%, while the benchmark 10-year yields are up 5 basis points this week to 4.2840%. Gold prices took a 1.5% tumble overnight and was last steady at $2,745.69 an ounce.

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