Perspective

Markets calm after easing of Middle East tensions. The Dollar remains near 5-month highs despite an easing in Iran-Israel tensions, as Israel’s retaliation to Iran’s missile barrage of the week before proved very limited and deniable by both sides. Recent hawkish comments from FED members have caused markets to price in just one rate cut for 2024 as other major central banks are expected to make multiple rate cuts. Emerging market currencies have seen a pullback following a strong start to the year over fears that persistent inflation and a strong dollar is set to keep US interest rates at elevated levels.

US Dollar

In the past week, we saw the US Dollar remain flat as markets calmed due to the easing of tensions in the Middle East.

There was no market-moving data out of the US last week as a hot retail print was largely offset by weaker-than-expected house price data.

On Friday, Chicago Fed President Austan Goolsbee said the Fed should hold off on reducing rates as progress on bringing down inflation stalled this year. Markets now expect the central bank to hold rates steady until September and to see no more than one rate reduction this year.

Traders will be looking ahead to US GDP data on Thursday and the Fed-preferred PCE Price Index report on Friday for further guidance.

Asia-Pacific

 In China, we saw the Renminbi weaken to 7.24 against USD last week. In a rare data-heavy week, we saw GDP growth beat expectations at 5.3% for Q1. Misses in house prices, retail sales and industrial production, however, pushed the Renminbi to weaker levels against the dollar. Market participants are suggesting the central bank may allow the rate to be fixed at a weaker level to provide a much-needed boost to the struggling export sector, which would be an echo of the economic strategy that China followed up until 2010. For now, it looks like trading will remain within a tight range controlled by the central bank.

The Japanese Yen hovered at 34-year lows around 154.7 to the US dollar, trading near levels markets fear could prompt government authorities to intervene in the currency markets. There is growing speculation that Japan could coordinate with the US and South Korea to prop up the Yen after the US acknowledged serious concerns about currency movements in their trilateral meeting last week. Investors will now focus on the Bank of Japan’s policy decision this week, where it is expected to maintain current monetary settings. Meanwhile, BOJ Governor Kazuo Ueda said at the G20 summit last week that the central bank may raise interest rates again if Yen’s weakness leads to sustained price increases through higher import costs. Data in the last week showed a marked uptick in exports but the 4.9% decrease in imports will alarm policymakers. The annualised inflation print on Friday came in slightly lower than expected at 2.7% but is still increasing month over month.

The Australian Dollar dropped to 0.64 against USD last week, representing a 0.75% weekly decline. Unemployment ticked up to 3.8% but beat market expectations of 3.9%. The Australian Dollar largely declined due to weak Chinese data and a stronger USD as Middle East tensions have been pushing haven flows back to the US Dollar in recent weeks. On top of this, a hawkish FED and struggling China are doing little to sport the Aussie at this moment in time.

South Asia

INR strengthened against the dollar last week trading a touch above 83.35. Trade data showed strong boosts in exports/imports, there was a slight miss in inflation but reported bank dollar selling helped support the Rupee against a stronger US dollar.

PKR ended the week trading flat against USD at 278. There were no data releases of note out of Pakistan last week.

Middle East and Africa

The Nigerian Naira strengthened by a further 8% to 1147 against the USD last week. An unwelcome uptick in inflation and, in particular, food inflation is a point of concern for a central bank that has recently tightened monetary policy. The Naira is now one of the better-performing world currencies in 2024 after a recent reset in economic policy effectiveness, but a reported drop in forex reserves is causing some market participants to claim the Naira’s exchange rate is being managed in ways that are not publicly acknowledged. Central bank governor Oscar Cardoso denies this claim, saying the two moves are not related.

The Kenyan Shilling weakened by 2.6% last week to end the week trading at 133 vs USD. Reported pent-up demand in the fuel and manufacturing sectors is putting pressure on the Shilling. A second consecutive week of depreciation may be a cause of concern for Shilling holders after an extremely strong start to the year. A hawkish FED and ongoing Middle East tensions may weigh further on the shilling in the coming weeks.

South African Rand ended the week trading 1.1% weaker against USD at 19.05. A strong inflation print was largely offset by weaker-than-expected retail sales as the Rand weakened against the dollar.

Europe

Sterling fell to a new five-month low on Friday, and GBP was down 0.65% for the week at 1.235 against USD. Data showed drops in headline and core inflation, both in line with expectations, but a higher-than-expected increase in unemployment to 4.2%. Deputy BoE Governor Dave Ramsden suggested that the risk of British inflation remaining excessively high has diminished, and it could potentially fall below the BoE's most recent forecasts. This statement came shortly after Ramsden's colleague Megan Greene cautioned against the central bank considering interest rate cuts, citing recent data indicating elevated wage growth and services price inflation in Britain. Markets now anticipate the first reduction in borrowing costs occurring at the August meeting, compared to previously anticipated September, with the possibility of an even earlier adjustment as soon as June. Recent preliminary data showing that UK GDP rose 0.1% in February, which would indicate that the country has exited its shallow recession would not fundamentally alter this picture as it points to a still-feeble rate of growth.

The Euro was one of the few major currencies to hold its ground against the dollar last week as it firmed a touch above 1.06 but remains near 5-month lows. Data showed inflation dropping in line with expectations and ECB policymakers' statements hinted at a readiness to commence reducing borrowing costs as early as June, with market participants now foreseeing a total of three rate cuts by the end of 2024. Traders are now increasing bets on the Euro to return to parity with the dollar this year with bets of US rate cuts being slashed and ECB cuts being moved forwards. Along with this, heightened tensions in the Middle East and Europe are predicted to push further safe-haven flows back to the dollar.

Other news

Bitcoin, the world's largest cryptocurrency, on Friday completed its "halving," a phenomenon that happens roughly every four years when the energy budget required to mine new coins increases which, all else equal, should constrain supply and push price up. Bitcoin was stable immediately afterwards, falling 0.5% to $63,747. Bitcoin enthusiasts had eagerly waited for the change to the cryptocurrency's underlying technology which is designed to cut the rate at which new bitcoins are created, historically causing the price of the underlying asset to increase.

Russia and China have almost completely de-dollarised their mutual trade according to Russian foreign minister Sergei Lavrov. More than 90% of trading is now completed in the two countries’ national currencies according to Lavrov. This move comes following the heavy sanctions placed on Russia by the US following their invasion of Ukraine in 2022.

The US House of Representatives approved a long-stalled $61bn military aid package for Ukraine. Assuming the assistance arrives on a fast enough timetable to avoid Ukraine being routed this summer, this points to a longer, harder conflict for Russia and sustained pressure on the rouble.

Performance against US Dollar