Monday, 19 March 2018

Dollar steady as Fed dot plot thickens; yen edges higher

TOKYO/SINGAPORE (Reuters) - The dollar held steady against a basket of major peers on Monday as traders braced for new Federal Reserve Chair Jerome Powell’s first monetary policy meeting this week, and as the increased threat of trade protectionism kept markets on edge.

The safe haven yen edged higher as investors’ risk appetite waned, with MSCI’s broadest index of Asia-Pacific shares outside Japan slipping 0.2 percent.

Traders are also nervous after weekend polls suggested a massive drop in public support for Prime Minister Shinzo Abe over his handling of a festering cronyism scandal, which has raised doubts about his ability to press forward with his reflationary economic agenda including monetary easing.

The dollar’s index against a basket of six major peers stood at 90.276. On Friday, the dollar index had hit a two-week high near 90.38, following strong U.S. economic data.

U.S. industrial production surged in February, while the University of Michigan Consumer Sentiment Index rose in March to the highest level since 2004.

The figures reinforced views that the global economy is enjoying strong growth and that the Federal Reserve will raise interest rates at the end of its policy meeting on Wednesday.

With a 25 basis point rate hike seen as a done deal, a key focus is on whether Fed policy makers forecast four rate hikes this year in their “dot plot” projections, instead of three they had projected at a December meeting.

The prospects of more rate hikes typically support a currency because higher interest rates tend to attract funds. However, recent political headlines have drawn more attention as investors fret that U.S. President Donald Trump’s tariff and other protectionist policies could disrupt the U.S. and global economy.

The Canadian dollar has taken the brunt of worries about U.S. protectionism, as investors discount the risk Trump may walk out of the North American Free Trade Agreement.

The Canadian currency slipped to C$1.3111 per U.S. dollar earlier on Monday, its weakest level since June 2017. It last stood at C$1.3102, little changed on the day.

In Japan, domestic politics have been an increasing focal point for traders.

A Nippon TV poll found Abe’s support crumbling some 14 percentage points from last month to 30 percent, the lowest for that poll in Abe’s more than five years in office.

The dollar eased 0.1 percent to 105.84 yen, inching back in the direction of a 16-month low of 105.24 yen set on March 2.

Most traders think the yen will rise if Abe has to resign given that his push for aggressive monetary stimulus has weighed on the currency.

“Japanese political risk will be a market focus for now. There is the risk that ‘Abenomics’ will be rolled back,” said Shinichiro Kadota, strategist at Barclays in Tokyo.

The yen also rose on the crosses, with the euro down 0.3 percent against the Japanese currency at 129.89 yen.

“There’s political concern in Japan, but also a lot of cross/yen selling,” said Tareck Horchani, head of sales trading in Asia-Pacific for Saxo Markets in Singapore.

Against the dollar, the euro fell 0.2 percent to $1.2270.

The common currency has been in a holding pattern since it hit a three-year high of $1.2556 on Feb. 16, with its March 1 low of $1.21545 seen as another support level.

Reporting by Hideyuki Sano

Powell's Fed to show policy caution, shun political friction

WASHINGTON (Reuters) - Jerome Powell heads for his first interest rate increase as Federal Reserve Chairman this week with an unanswered question looming above others: could his optimism about the U.S. economy lead to more hikes than markets have prepared for?

Powell’s public comments and Reuters conversations with his Fed colleagues since January, when he was confirmed as chairman, suggest such fears are overblown: Powell, the consensus-builder, may make some tweaks to reflect changing economic conditions but is as committed to gradual, moderate rate increases as his predecessor Janet Yellen who adopted that approach.

The new chairman’s overriding concern will be to sustain one of the longest U.S. recoveries for as long as possible, according to conversations with Fed officials and analysts. But given signs that the economy’s potential has strengthened, that might mean a policy-tightening cycle that lasts longer, with rates going a bit higher than earlier thought.

Powell was widely seen as a choice of continuity when President Donald Trump picked him. He served as one of the Fed governors during the central bank’s transition from crisis-era stimulus to a more balanced approach that led to three rate increases last year in response to steady growth and falling unemployment.

Yet uncertainty over how the 65-year old lawyer and former investment banker would steer the Fed was on full display last month when global stocks sold off briefly after Powell’s first congressional testimony.

Investors initially took his upbeat assessment of the U.S. economy as a sign he was more of a policy “hawk” than Yellen, and that four rate hikes might be in store for this year rather than the three previously telegraphed by the Fed.

This might still turn out to be the case. Even the dovish Fed Governor Lael Brainard noted recently that the economy’s “headwinds are shifting to tailwinds.”

But a stronger economy does not necessarily mean the Fed is abandoning its balanced assessment of risks to growth and price stability. Rather, it can give Powell wiggle room in balancing nudging inflation up after more than five years below target, and guarding against the risk of runaway prices as some $1.8 trillion in tax cuts and new government spending take hold.

Under Yellen, the central bank was still more guarded about the economic impact of such fiscal stimulus that could overheat an economy already near full capacity, but also boost business confidence and productivity, giving the rates more room to rise.

One hint whether the Powell Fed now sees more policy leeway will come on Wednesday when the central bank will publish its new median estimate of the so-called neutral rate of interest - the level that neither stimulates nor chills the economy.

This rate has drifted down to a 2.75 percent median, from 4 percent in 2013. A rise to, say 3 percent, could signal the fiscal stimulus and recent data like the blockbuster February jobs report have begun convincing Powell and others that the gradual rate-hike cycle could go on for another couple years or more, allowing extra room to cut rates in the next recession.

The Fed is expected to lift its policy rate to a range of 1.5 to 1.75 percent at the end of its two-day meeting on Wednesday and also update its assessment of the economy.

Months of synchronized global growth, some signs of U.S. price pressures and fears Trump's protectionist steps could escalate into a trade war have fanned concerns within the Fed that inflation, now a bit below its 2-percent target, could accelerate.

Some policymakers also worry the tax cuts could stoke risky investments that could tip the economy into another downturn.

But the Powell Fed is likely to take extreme care not to over-react to stronger economic data, according to a series of public statements by policymakers and minutes of their January meeting.

Investors can also take comfort from what those who have worked with Powell describe as his “if it ain’t broke, don’t fix it,” approach, which ultimately helped him land his job.

While Powell has shown little appetite for sweeping changes, such as revamping an inflation-targeting regime as advocated by some of his colleagues, the new Fed chief has already begun setting his own tone.

He is “careful and practical but definitely open to new approaches,” said Narayana Kocherlakota, former Minneapolis Fed president who worked with the then-Fed Governor Powell between 2013 and 2015.

For one, Powell, a Republican former Treasury official who enjoys his regular private meetings with lawmakers of both parties, emphasizes a warmer relationship with Congress and avoids venturing outside of the Fed’s strict policy remit.

During his first appearance on Capitol Hill as Fed chief, when asked what he was willing to do to ensure economic growth benefits all Americans and not just elites, Powell stuck to the script saying the Fed simply lacked the tools to do that.

That marks a contrast to the era when Yellen and her predecessor Ben Bernanke were in charge.

Their years in office were dominated by innovation and experimentation in the face of crisis, an overhaul of how the Fed sets and communicates policy, and sometimes free-form public discussions about social issues like inequality that put Yellen in particular at odds with the Republicans who control Congress.

So far Powell has dropped no hints of immediate changes to press conferences or other means of communication. His reluctance to take unnecessary risks may convince him that any change could confuse the public, do little to improve policy, and draw unnecessary political fire.

Reporting by Jonathan Spicer and Howard Schneider

Sunday, 18 March 2018

Investors eye currencies for those most at risk in a trade war

LONDON (Reuters) - Foreign exchange markets appear convinced that a global trade war is unlikely to break out anytime soon, although with long bets on some currencies at record highs, investors fear complacency may be setting in.

While the Trump administration’s threat to slap tariffs on Chinese imports has heightened fears of retaliation from Beijing, it has only mildly rattled markets enjoying a multi-year rally as global economic growth picks up.

The finance ministers of the 20 big world powers meet for a key G20 summit on Monday. Currency managers are keen to see whether diplomacy breaks out or disagreements deepen between the U.S. and others in the wake of U.S. President Donald Trump’s announcement on imposing tariffs on steel and aluminum imports.

Currencies don't like trade spats. President Obama's relatively narrow tariffs on Chinese steel in May 2016 saw the dollar index fall more than 2 percent over a month. Against the yuan, it rose 2 percent.

Similarly, within three months of President George Bush’s March 2002 tariffs on EU steel imports, the dollar declined 6 percent.

The latest trade skirmishes come as global currency volatility slips back after a February spike off multi-year lows. It remains below levels seen in recent months, according to a Deutsche Bank volatility gauge.

That leaves investors looking for early warning signs in currency markets that a broader shake-up of prices is coming.

Some currencies have moved as one would expect when smooth trade is under threat: The Canadian dollar has weakened and the Japanese yen has firmed, but the moves have for the most part been limited.

“The talk of trade wars at the moment is just that, talk. It’s such a difficult thing to quantify it appears as if the market is just ignoring it,” said Russell Silberston, a currencies manager at Investec Asset Management, which manages about $140 billion in assets.

“But don’t get me wrong, we’ve got it (the prospect of a trade war) down as a key event risk.”

Currency repercussions should a trade war materialize would be significant because low volatility levels have driven investors to embrace higher-risk strategies. Speculative positions in emerging market currencies, for instance, stand at multi-year highs.

“I’m still amazed by the lack of a reaction in Asian currencies. They must be waiting for the Chinese retaliation,” said Richard Benson, co-head of portfolio investments at Millennium Global, a currency investment manager in London.

“There would be quite meaningful moves. We are talking about Asian currencies that are at their strongest for years. There is zero of this (the risk of protectionism) priced in,” he said.

Benson believes big Asian exporters are most at risk, including the South Korean won and the Taiwanese dollar as well as the Australian dollar - a proxy for Asian economic growth.

The won and the Singapore dollar , another currency exposed to global trade flows, are trading near their strongest levels against the dollar in more than three years.

Among developed world currencies, Sweden’s crown is tipped by some for a tough time - ING strategists point out Sweden is the second-most open economy in the G10 group of rich countries based on a ratio of trade and economic output.

Bank of America Merrill Lynch sees the Canadian dollar CAD= most at risk, while the U.S. and New Zealand dollars also look vulnerable. The Swiss franc and euro would emerge stronger, they said.

Much of the confidence that the world will ride out Trump-inspired tariffs is because a sustained rebound in trade has buoyed growth, with the global economy set to expand at its fastest pace in six years.

While governments often move to protect local industry when growth is struggling, any Trump tariffs will come at a time when the world’s biggest economic engines - the United States, Europe and China - are booming.

Another explanation for the currency calm is that many market watchers do not believe Trump will follow through on his threats. David Bloom, head of global currency research at HSBC, is convinced U.S. officials may find a weaker dollar an easier solution in their bid to slash the huge U.S. trade deficit.

So what does rising protectionism mean for the dollar?

In the short-term, the dollar is likely to weaken, especially against the euro and yen. But should global growth tank or markets sink into a broader sell-off, the dollar should benefit from its status as a global reserve currency.

Investors are at least convinced about one winner: the yen, backed by a huge current account surplus and its reputation as a safe-haven thanks to the trillions of dollars that Japanese investors have poured into overseas assets.

“If there is a trade war, the yen is the safe-haven currency of choice,” said Manuel Oliveri, an FX strategist at Credit Agricole.

The yen has gained 6 percent so far this year and is near a 1-1/2 year high versus the dollar thanks in part to bets that the Bank of Japan will pull the plug on its massive bond-buying program.

BlackRock, the world’s biggest money manager, has studied immediate market reactions around six major trade risk events in the last 15 years and concludes that gold and the yen tend to outperform.

In a note, they called a trade war “arguably the most disruptive” market risk for 2018.

Reference: Tommy Wilkes, Saikat Chatterjee

Friday, 16 March 2018

Sterling edges higher against struggling dollar

LONDON (Reuters) - Sterling edged higher against a struggling dollar on Friday and is poised for its biggest weekly rise in a month as investors became cautiously optimistic that Britain would strike a deal at a summit next week over a transition period for its EU exit.

While sticking points remain such as a deadlock over the Irish border issue and recent headlines from senior officials have highlighted that differences remain, businesses have raised hopes the bloc’s leaders can endorse a transition at a Brussels summit on Friday.

“A transition deal is not a game changer for the currency markets but what will be a major driver is if we get an open-ended transition deal which will take away the nervousness of a hard Brexit,” said Morten Helt, a currency strategist at Danske Bank in London.

On Friday sterling was up by a quarter of a percent at $1.3977. For the week, it has gained one percent, its biggest rise in a month.

Against the euro, which is a better barometer for Brexit negotiations, sterling consolidated gains at a 2-1/2 week high of 88.16 pence.

Sterling hit $1.4346 on Jan. 25, its highest level against the U.S. dollar since Britain voted to leave the European Union in June 2016.

Though it has pulled back modestly from those highs, it remains near the top of its trading range of $1.20 to $1.43, buoyed by hopes a Brexit transition deal will be eventually be struck and by a generally weaker U.S. currency.

In other major developments next week, the Bank of England is set to announce a policy decision which may shed some light on the future path of interest rates. Markets are now pricing in about 36 basis points of rate hikes over the year.

Britain’s reliance on the “kindness of strangers” to finance its large current account deficit appears to be increasing, the Bank of England said on Friday.

Reporting by Saikat Chatterjee

Dollar retreats vs. yen after White House shake-up report

TOKYO (Reuters) - The dollar fell versus the yen on Friday, after a report that U.S. President Donald Trump would remove his national security adviser added to concerns about recent White House personnel changes and what that meant for policy.

Trump has decided to replace his national security adviser, H.R. McMaster, the Washington Post reported on Thursday.

Earlier this week, the U.S. currency took a hit after Trump dismissed Secretary of State Rex Tillerson as investors grew increasingly nervous about the direction U.S. policy might now take following a series departures by key members of staff.

The dollar was 0.4 percent lower at 105.940 yen after briefly touching 106.380.

The greenback was down about 0.8 percent on the week against the safe haven yen, which was boosted earlier as a political scandal engulfed Japanese Prime Minister Shinzo Abe, casting doubts on the sustainability of his economic stimulus policies.

“The best explanation for the impact the ongoing personnel changes taking place in the White House is that the dollar stands to weaken as it gets easier for President Trump to pursue protectionist policies,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

The yen, which tends to gain in times of risk aversion, also advanced against other currencies in the wake of the latest shake-up in the White House.

The euro was down 0.35 percent at 130.410 yen, the Australian dollar slipped 0.2 percent to 82.56 yen and the New Zealand dollar lost 0.8 percent to 76.76 yen.

The New Zealand dollar’s losses against the yen in turn dragged it down versus the U.S. dollar, with the kiwi shedding 0.4 percent to $0.7245.

The dollar managed to hold gains against a basket of peers, as recent concerns about the currency arising from trade tensions eased slightly and next week’s Federal Reserve policy meeting came into focus.

The dollar index versus a group of six major currencies was little changed at 90.081 after climbing 0.5 percent the previous day.

Prior to the overnight bounce, the index had fallen for three straight sessions as fears of a global trade war grew amid signs of rising U.S. protectionism.

“U.S. protectionism is a key factor, but it is also a theme with a long timeframe,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

“The market perhaps reacted excessively and the dollar was oversold, and now we are seeing those moves being balanced out as participants turn their focus on other events.”

The two-day Federal Open Market Committee meeting begins on March 19 at which the U.S. central bank is expected to raise interest rates for the first time this year.

The euro was steady at $1.2309 after declining 0.5 percent overnight. The common currency was little changed on the week, failing to make much headway against its struggling U.S. peer as the European Central Bank has stressed that its exit from easy monetary policy would be very slow.

The Canadian dollar retreated to an eight-month low after soft housing data reinforced views that the Bank of Canada could slow down the pace of its interest rate hikes.

The loonie also came under pressure after President Trump’s comments on commerce with Canada renewed trade concerns.

The Canadian dollar was little traded at C$1.3058 per dollar after reaching C$1.3072, its weakest since late June 2017.

Reporting by Shinichi Saoshiro

Asian shares slip as new U.S. political worries sour mood

TOKYO (Reuters) - Asian stocks slid on Friday as reports of more chaos in the Trump administration tested investors’ nerves, already frayed by fears that U.S. tariffs could hurt the global economy and trigger a trade war.

European stock futures point to a weaker start in Europe, with futures of Britain's FTSE and France's Cac down 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.2 percent in early trade. Japan's Nikkei was down 0.6 percent.

On Wall Street, the S&P 500 edged 0.08 percent lower on Thursday, marking its first four-day losing streak of 2018. The Nasdaq Composite  dropped 0.2 percent.

U.S. shares hit a session low soon after the New York Times reported that U.S. Special Counsel Robert Mueller had issued a subpoena for documents related to U.S. President Donald Trump’s businesses.

The Washington Post, meanwhile, reported that President Donald Trump has decided to remove H.R. McMaster as his national security advisor.

The news came just days after following the recent departure of two key officials, former Secretary of State Rex Tillerson and top economic advisor Gary Cohn, from the Trump administration.

The developments, together with the report earlier this week that Trump is seeking to impose tariffs on up to $60 billion of Chinese imports, cemented investor concerns that the administration is increasingly leaning towards protectionism.

White House trade adviser Peter Navarro has said that Trump would in coming weeks get options to address China’s “theft and forced transfer” of American intellectual property as part of the investigation under Section 301.

“The key here is whether the main battle ground of the trade war will reach IT digital products. In this sector, there is division of labour in the supply chain, with each country having specialised products,” said Hiroshi Watanabe, economist at Sony Financial Holding.

“Investors have been thinking the U.S. would not take such steps as that would harm itself. But the fall in high-tech shares yesterday may suggest that investors have begun to take such risks into account,” he added.

Fears that the tariffs could disrupt synchronised global growth dwarfed recent strong economic data, including a fall in U.S. jobless claims.

Any disruptions to the information sector will cost investors particularly dearly given the sector has been the main engine of the global share rally during the past decade.

“It seems as if for Trump, only ‘America First’ policies are left to boost his popularity and to get re-elected,” said Hiroko Iwaki, senior strategist at Mizuho Securities.

“It is hard to expect political uncertainties to disappear soon. That will underpin bonds,” she added.

U.S. Treasuries yield stood little changed at 2.822 percent in Asia after having hit a near two-week low of 2.797 percent on Thursday.

In contrast, short-term bond yields rose as investors braced for a widely expected rate hike by the Federal Reserve next week, with the two-year yield hitting a 9 1/2-year high of 2.295 percent.

In Europe, the German Bund yield hit a six-week low of 0.566 percent.

Political uncertainties are mounting in Japan, where Prime Minister Shinzo Abe is under pressure for suspicions of a cover-up in a controversial land sale.

In the currency market, rising risk aversion pushed the dollar lower against the safe haven yen to 105.94 yen JPY= down 0.4 percent.

The euro was little changed at $1.2303 EUR=, having slipped 0.5 percent the previous day.

Subdued risk sentiment kept the dollar supported against riskier currencies, such as commodity-linked currencies and emerging market currencies.

The Canadian dollar CAD=D4, which has been hit also by worries Trump may pull out from NAFTA, hit a nine-month low of C$1.3072 to the dollar.

The Australian dollar AUD=D4 dropped to as low as $0.7771, its lowest level in 10 days.

“The Australian dollar had been resilient during this month’s tensions, suggesting that the very bullish global growth narrative is yet to be really shaken,” said Westpac senior currency analyst Sean Callow.

“But should the U.S.-driven trade tensions deepen in the months ahead, the Australian dollar is likely to be one of the currencies hardest hit, given Australia’s current account deficits and its heavy reliance on China for commodity exports.”

Oil prices were little changed after ending choppy Thursday trade higher as the International Energy Agency said global oil demand is expected to pick up this year, but warned supply is growing at a faster pace.

Brent futures stood flat at $65.11 per barrel.

Reference: Hideyuki Sano

Thursday, 15 March 2018

Asia stocks sag, bonds advance amid simmering trade worries

TOKYO (Reuters) - Asian stocks sagged on Thursday while government bonds attracted safe-haven demand amid mounting investor concerns that growing trade tensions will hurt the global economy.

Spreadbetters expected European equities to fare slightly better at the open, with Britain’s FTSE starting unchanged, Germany’s DAX gaining 0.3 percent and France’s CAC rising 0.25 percent..

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.13 percent.

The Asian markets took their cues from Wall Street shares, which fell for the third straight session overnight after U.S. President Donald Trump sought to impose fresh tariffs on China, intensifying fears of a trade war.

“While U.S. and Chinese officials could be negotiating behind the scenes in an attempt to prevent the situation from worsening, the markets will remain concerned as long as President Trump seems to be going his own way on the matter,” wrote Xiao Minjie, China-focused senior economist at SMBC Nikko Securities in Tokyo.

Boeing Co, seen as particularly vulnerable to retaliation from U.S. trade partners, fell 2.5 percent, leading the losers on the Dow.

Shanghai lost 0.3 percent, Hong Kong’s Hang Seng was flat and Australian stocks fell 0.25 percent. Japan’s Nikkei erased earlier losses and crawled up 0.12 percent.

Japan’s equity market “has been holding up relatively well, but it will have to decline some more if U.S. shares deepen their losses,” said Yutaka Miura, senior technical analyst at Mizuho Securities in Tokyo.

“Bargain hunters buy steadily at price dips, but most participants are wary of chasing highs amid lingering uncertainty about trade and politics.”

The benchmark 10-year Treasury yield dipped to 2.806 percent and headed for a fourth day of declines amid rising diplomatic tension between Britain and Russia, soft U.S. retail sales data and concerns over Washington’s political and trade issues.

The spectre of a trade war also boosted demand for European debt. The German 10-year bund yield was at 0.594 percent after falling to a 1-1/2-month low of 0.583 percent. Yields on British gilts and French government bonds were also lower.

In the currency market, the dollar came under pressure again after the greenback managed a modest bounce overnight following three days of losses.

The dollar index, which measures it against a basket of six major currencies, was a shade lower at 89.698. So far this week, it has fallen about 0.5 percent, dogged by trade tensions and perceived political turmoil in Washington.

The euro edged up 0.05 percent to $1.2373 after being pulled back from a six-day high of $1.2413 when European Central Bank President Mario Draghi on Wednesday struck a dovish tone on monetary policy.

The yen, often sought in times of risk aversion, gained against a variety of peers.

The dollar slipped 0.35 percent to 105.960 yen after taking a hit the previous day on Trump’s firing of U.S. Secretary of State Rex Tillerson.

The euro fell 0.4 percent to 131.045 yen and the Australian dollar shed 0.5 percent to 83.36 yen .

Oil prices held steady, supported by healthy global demand but capped by a relentless rise in U.S. production that is undermining efforts led by producer cartel OPEC to cut supplies and prop up markets.

Brent crude futures were flat at $64.89 per barrel .

Safe-haven gold rose, with spot prices gaining 0.1 percent to $1,326.16 an ounce.

Reporting by Shinichi Saoshiro