OVERNIGHT MARKET SUMMARY
The U.S. dollar index fell for a second-straight session overnight as investors were encouraged by firmer global stocks and an improvement in overall market sentiment. The greenback had benefited from the recent turmoil in global financial markets, putting in its best weekly performance against a basket of its major rivals since 2016 last week. The nascent rise in global stocks this week has prompted many investors to cautiously seek higher returns in riskier assets. More broadly, investors looked to trim exposure to the U.S. dollar ahead of key economic data tomorrow and amid mounting worries about a ballooning of the U.S.’s deficit following massive tax cuts, an expansionary budget funded by deficit spending and increasing focus on infrastructure improvement.
The Japanese yen jumped to its highest level against the greenback in five months, despite the improved mood in global financial markets, which typically tends to undermine demand for the safe-haven yen. The breach of key technical resistance levels for the Japanese currency triggered automatic trading orders and exacerbated the yen’s sharp move higher overnight. Investors have largely looked past the reappointment of Governor Haruhiko Kuroda for a rare second term at the helm of the Bank of Japan- a likely signal of continuity in the bank’s ultra-accommodative monetary policies.
The euro found renewed support amid firmer global stocks yesterday, which helped it snap four-straight sessions of losses against the dollar last week. A quiet start to the data calendar this week both in the U.S. and in the euro zone has resulted in many investors reverting back to last year’s winning trade- sell the dollar against the euro amid expectations that the ECB will wind down its asset purchasing operation later this year.
Sterling rose for the second session against the weaker U.S. dollar overnight. The pound’s improved tone was fueled by news that U.K. CPI in January held near its highest level in five and a half years, confounding expectations for a slight drop. The slightly hotter than expected consumer inflation data added to expectations that the Bank of England may have to raise lending rate earlier and perhaps further than previously expected.
The South African rand, which jumped to its highest level against the greenback in nearly three years yesterday amid reports that the ruling African National Congress (ANC) Executive Committee had decided to “recall” troubled President Jacob Zuma, pared some gains this morning after a party executive said the timeline for Mr. Zuma to step down could not yet be agreed upon.
USD: The dollar, which put in its best weekly performance against a basket of its major rivals since 2016 last week, fell for the second straight session as improving global stocks and an overall reduction in risk aversion in global markets encouraged investors back into riskier assets. A flight to safety during intense market volatility last week had supported the dollar against most of its major rivals. But with equity markets finding some nascent stability (for now), traders seemed less willing to hold dollars. Profit taking ahead of tomorrow’s closely watched U.S. CPI and retail sales data was adding to the dollar’s heavier tone. Finally, investors are increasingly focused on the widening budget deficit in the U.S. following last year’s massive tax cuts, last week’s deficit-fueled budget and the shift in legislative focus onto infrastructure. An expansionary fiscal policy is offsetting some of the benefits to the dollar from tighter monetary policy.
JPY: The yen jumped to its highest level in five months against the U.S. dollar, despite the elevated Treasury yield backdrop and amid and improvement of overall market sentiment. The yen blasted through key resistance against the dollar, which triggered automatic buy orders and exacerbated its surge overnight. While further upside for the yen, especially given its recent momentum, looks likely in the near-term, its longer-term outlook may be less positive. Steady U.S. lending rate increase and by all accounts, a BOJ that looks far less willing than other major central banks to begin normalizing monetary policy should help support the greenback. This week, Japanese Prime Minister Abe signaled that he would reappoint BOJ Governor (and policy dove) Kuroda for a rare second term at the helm of the nation’s central bank- an indication that the ultra-easy policy regime under Kuroda will likely remain place for the foreseeable future.
GBP: Sterling strung together two-straight winning sessions against the greenback following its worst weekly showing in four months last week. Data overnight showed U.K. CPI remained steady near a five and a half-year high of 3.0%(y/y) in January, confounding expectations for another drop to 2.9%(y/y). The hotter than expected CPI print helped push up the odds of a May interest rate hike by the BOE to as high as 70% and pushed the odds of a second hike by the end of 2018 to as high as 50%. Next up for the U.K. calendar will be Friday’s January retail sales report.
ZAR: South Africa’s rand jumped back toward its highest level against the dollar in nearly three years yesterday after news emerged that the ruling ANC Executive Committee had asked President Jacob Zuma to step down. An official announcement from Mr. Zuma is likely this week. The rand fell overnight on some profit taking after a party official said the timeline for the president’s departure could not yet be agreed upon.
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