Aurelia Butler

BENGALURU (Reuters) – Most emerging-market currencies are set to regain their recent strength later this year after some near-term paralysis as expectations of interest-rate cuts by the U.S. Federal Reserve keep the dollar in check, a Reuters poll found.These currencies have popped higher in the past few weeks, driven by market bets for aggressive rate cuts by the Fed this year, dragging down U.S. bond yields. Those bets have eased somewhat in the first days of 2024, but only slightly. The recent U.S. dollar sell-off has helped a wider index of emerging-market currencies gain nearly 3.5% since early November 2023.However, with the greenback’s recent slide predicted to be brief and the risks of mispricing future Fed rate cuts increasing, gains in EM currencies will be moderate at least in the first half of the year. [EUR/POLL]According to the Jan. 2-4 Reuters poll of 55 strategists, 11 of 15 EM currencies in the poll were forecast to gain against the dollar in 12 months, of which eight were predicted to recoup all of their 2023 losses.Still, with the timing of the Fed’s launch of its easing cycle still unclear, median three-month estimates for some EM currencies like the Turkish lira and Russian rouble were slightly weaker compared with last month’s poll.Chris Turner, ING’s head of FX strategy, said that while EM currencies should have a positive year overall, the start of 2024 may be difficult as “expectations for easier policy in the U.S. and Europe have probably come too far, too fast.” “But when it becomes clear in Q2 the Fed will indeed ease … that should be a pretty benign and positive environment for emerging-market FX.”A majority of EM currencies including the Chinese yuan, Indonesian rupiah, Korean won, Thai baht, Malaysian ringgit, Vietnamese dong and Taiwan dollar were expected to gain between 2.1% and 5.0% in a year. The Indian rupee was forecast to gain only about 1% to 82.50 per dollar in a year, barely changed from last month’s prediction. [INR/POLL]The Turkish lira, South African rand and Russian rouble were among the few currencies not predicted to recover all of their losses from 2023 this year. Another source of support for EM currencies comes from lower expectations of rate cuts not only by the Fed but by central banks in developing countries too, against a backdrop of reasonably stronger domestic economic growth. “We currently don’t forecast the Fed to cut by as much as what the market is pricing in … that would perhaps suggest some or more limited scope for this year for EM currencies to gain substantially,” said Mitul Kotecha, head of FX and EM macro strategy Asia at Barclays.”But probably as we go through the year we would maybe see some further upside for EM.”(For other stories from the January Reuters foreign exchange poll:) More

BENGALURU (Reuters) – The U.S. dollar’s recent slide appears to be short-lived as some speculators have already reduced bets for aggressive Federal Reserve interest rate cuts this year, according to a Reuters poll of strategists who still say it will be weaker in a year.Market expectations that the Fed will start easing policy as early as March were tempered when minutes from December’s policy meeting showed most policymakers agreed borrowing costs need to remain high for some time, suggesting a March cut is less likely. After the release, the dollar rose against a basket of currencies and is already up around 1% for the year following a 5% dip in the previous two months. Interest rate futures on Wednesday were pricing in a roughly 66% chance the Fed starts cutting in March, down from 87% a week ago, according to CME FedWatch. Any further pullback in bets is likely to give the currency a leg up in the near term.”In the short run, we think the dollar could gain a bit, mainly because we think the market is being too aggressive at pricing in Fed rate cuts…our base case is the Fed will wait until May before cutting,” said Brian Rose, senior economist at UBS Global Wealth Management.”We have seen the dollar rebounding a bit in recent days and the dollar could be stable or maybe a bit higher in the near term.”Making clear the dollar has not yet been decisively knocked off its perch, a majority of analysts, 36 of 59, said the greater risk to their three-month forecast was the dollar trades stronger against major currencies than they currently predict. The remaining 23 said the risk was it could trade weaker.However, most said the dollar will slip against major currencies in 12 months as the Fed’s latest dot plot predictions show three interest rate cuts by year-end. “Beyond the very short term, we still expect a further dollar decline to materialise this year as the deterioration in the economic outlook forces (a) large (amount of) Fed cuts,” said Francesco Pesole, FX strategist at ING.But any depreciation in the first half of this year will be moderate compared with the last couple of months, he said. The euro, which rose over 3% last year, its first yearly gain since 2020, was expected to capitalise on narrowing interest rate differentials and rise over 2% to trade around $1.12 in 12 months. It was trading at $1.09 on Thursday.Among other major currencies, the Japanese yen, which has dropped about 30% in the past three years, was forecast to gain 6.6% to change hands at around 135/dollar in a year.Sterling, which had a strong showing last year, gaining over 5.0%, was predicted to rise over 1.5% to $1.29 by year end. The Aussie and New Zealand dollars were expected to strengthen around 4% and 2.2%, respectively. (For other stories from the January Reuters foreign exchange poll:) More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The overall boost to UK savers’ incomes from higher interest rates outstripped the impact of increased mortgage payments on households, according to new research from the Resolution Foundation think-tank. The Bank of England’s decision to raise rates between December 2021 and August 2023 resulted in a £16bn income boom for savers, the research released on Friday showed.Real income from savings rose by £34bn over the period — more than offsetting the £18bn rise in debt interest costs. The boon accounted for three-fifths of all household income growth since the last quarter of 2021, the research found. The think-tank said the windfall from higher interest rates was “unprecedented” in recent UK economic history and internationally but noted the gains had been higher for wealthier savers.“The impact of the unlikely income boost has been very uneven — older, asset-rich households have gained the most, while younger mortgagor households have been hit hard,” said Simon Pittaway, senior economist at Resolution Foundation. He also warned borrowing costs were “likely to reduce” income on savings in the year ahead “presenting a fresh living standards challenge in an election year”.In the past two years the central bank has raised rates from a historical low of 0.1 per cent to a 15-year high of 5.25 per cent in an attempt to combat surging inflation.The think-tank said the proportion of households on variable rates has been shrinking and that this had been a key driver of the income boom. With a higher proportion of households on longer-term fixed-rate deals the overall pass-through from interest rate rises to mortgage costs had slowed. Some 37 per cent of households that had a mortgage when the central bank started raising rates in 2021 were on fixed-rate deals which had not yet ended.The research also found that household debt would continue to rise in 2024, and around 1.5mn mortgagors will see their annual mortgage expenses rise by £1,800 on average when their fixed-rate deals end this year. In contrast with the delayed impact on mortgage costs, the gains from higher savings interest had been more immediate.The windfall was boosted by “forced savings” accumulated during the pandemic when parts of the economy shut down.UK savings have been falling back from their pandemic peak. The income boom for savers is expected to decline in 2024 as the trend continues, and could be almost completely unwound by the end of year even if the central bank starts to cut interest rates. Markets expect the BoE will start cutting rates from the spring to 3.75 per cent by the end of 2024. Similar rate-rising cycles have delivered only a modest income boost in the eurozone and an income fall in the US because of a surge in non-mortgage interest payments. More

BOGOTA (Reuters) – Colombia’s economy is forecast to grow 1.8% in 2024, while inflation is expected to slow to 5%, paving the way for the central bank to cut its benchmark interest rate to some 8%, Finance Minister Ricardo Bonilla said on Thursday.GDP growth for 2023 is expected to have reached 1.2%, he added, lower than the minister’s previous forecast of 1.8% late last year. Latin America’s fourth-largest economy sputtered through the previous year, while inflation has remained persistently high, hitting 10.15% for the 12 months through November. “We expect … that the path of economic growth in 2024 hits 1.8%, which is to say that gradually we are emerging from this global slowdown,” Bonilla said during an interview in capital Bogota. Inflation for the end of 2023 is expected to come in at around 9.5%, Bonilla said, a significant drop from the 13.12% recorded in 2022 but significantly greater than the central bank’s 3% target.A Reuters poll last week revealed that analysts expect inflation in 2023 to have reached 9.43%. “That inflation continues to decline slowly but surely means we won’t reach the (central) bank’s 3% goal in 2024; it will be reached in 2025,” Bonilla said.Lower inflation would allow the central bank to cut the benchmark interest rate from its current 13%.The government will hold talks with business leaders over President Gustavo Petro’s proposal to make changes to a fiscal reform – passed early last year – to shift tax burdens away from companies and onto wealthy individuals, Bonilla said.”We’re going to start a process of socialization with economic players, business associations etcetera,” the minister said, adding that any proposed changes would be sent to Congress for approval. Since passing the initial fiscal reform at the start of 2023, Petro’s government has struggled to push through a trio of subsequent projects to reform health, pensions, and work.Colombia’s government is only opening discussions concerning the fiscal rule – imposing limits on the fiscal deficit – which does not guarantee changes or plans to breach it, Bonilla said. The fiscal deficit goal for 2023 was 4.3% of GDP.The country will continue issuing bonds and seeking loans, but will try to push back some maturity dates to increase investments.”We are looking for new international … players to participate,” he said. More

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Asian markets must wait over the weekend to trade on U.S. December employment data, the first globally significant economic release of 2024 that comes out after they close on Friday. But if subdued U.S. trade on Thursday is any indication, investors will be content to keep their powder dry Friday. Wall Street tried to steady from its two-day selloff and the Dow eked out a gain for the second time this week. But there was no obvious inclination to resume the late 2023 buying spree, while Treasuries leaned toward risk-off, though not enough to hump benchmark yields decisively back over 4.0%. That underpinned the dollar, especially against the yen which also had a Nikkei selloff, an earthquake and a deadly aircraft collision to reckon with on its first day back from a holiday break.Against the yen JPY=, the greenback rose to two-week peaks, climbing for three straight days. The dollar was last up 0.9% at 144.52 yen.It rose against the Chinese yuan to 7.1776, reaching the highest price since December 13 in U.S. trade. The Australian dollar fell to its lowest price since December 18.Thursday’s ADP National Employment report showed U.S. private employers hired more workers than expected in December. Other reports showed the labor market cooling. The question for financial markets is whether Friday’s nonfarm payrolls release solidifies current futures betting on five or more rate cuts by the Fed, starting in March. The yield on 10-year Treasury notes US10YT=RR was up 8.8 basis points to 3.995%. Its yield, which moves in the opposite direction of prices, briefly traded above 4% Wednesday, but has not maintained that level since falling below 4% in mid-December. Yields of the benchmark 10-year are up about 15 basis points over the first three trading days of the new year.”The market is ahead of itself and is not listening to what the Fed is saying,” said Judith Raneri, a portfolio manager at Gabelli Funds. The yield on 10-year Treasury note was up 8.8 basis points at 3.995%. It has taken a couple halfhearted runs at clearing 4% this week but has not maintained that level since falling below it in mid-December. What that means today for JGBs and other Asian government debt is not glaringly obvious but Japanese yields did tick higher on Thursday in a catch up with Treasuries after the extended market holiday. In related news, Citigroup said it aimed to launch its China investment banking unit as early as the end of this year, with about 30 staff. Here are key developments that could provide more direction to markets on Friday:- Japan consumer confidence (December)- US Nonfarm Payrolls and Unemployment(December) More

NEW YORK (Reuters) – Wall Street’s biggest banks shifted ahead of last month’s Federal Reserve meeting toward predicting the U.S. central bank would end its balance sheet reduction process later this year than previously thought, according to a survey released on Thursday by the New York Fed. Banks, referred to as primary dealers, now believe the process known as quantitative tightening, or QT, will end in the fourth quarter, according to a poll taken ahead of the Fed’s Dec. 12-13 policy meeting. In the primary dealer survey done ahead of the policy meeting that ended on Nov. 1, the banks collectively viewed the third quarter as the stopping point for QT. If the dealers are right, the Fed’s balance sheet will contract to $6.75 trillion from the current level of about $7.764 trillion. The dealers also predicted ahead of the December meeting that there would be $375 billion in the central bank’s reverse repo facility when QT ended, versus the expected $625 billion in the October survey. In the December survey, respondents said they expected bank reserves to be at $3.125 trillion at the end of QT, versus $2.875 trillion in the prior poll. The QT process has complemented the rate hikes delivered by the Fed as part of its effort to lower inflation back to its 2% target. The central bank aggressively bought Treasury bonds and mortgage-based securities at the start of the coronavirus pandemic in the spring of 2020, causing its overall holdings of cash and bonds to more than double to around $9 trillion by the summer of 2022. The Fed has been shrinking its holdings since last year, but has not given much guidance about how long the process will play out. Minutes from the Fed’s meeting last month, which were released on Wednesday, noted that some officials are now ready to talk about the how and when of ending QT. The question has been on the minds of investors and traders given the apparent end of the current rate hiking cycle and rising bets in financial markets that the central bank will be cutting rates as soon as next spring as inflation pressures wane. MONEY MARKET METRICSThe challenge for the Fed in dialing back stimulus is that it is trying to achieve a level of liquidity in the financial system that will allow it to retain control over short-term rates, with a cushion to deal with the volatility that can often strike money markets. But there’s no clear sense so far on how to measure the needed amount of liquidity. Michael Feroli, chief U.S. economist at J.P. Morgan, said in a note on Wednesday that more guidance on the QT endgame will be forthcoming soon. Given the nascent debate seen in the minutes of the December meeting, “we suspect this means that we could see a fuller discussion of potential balance sheet plans in the minutes” of the next Fed policy meeting, which takes place later this month, he said. Barclays economists said they expected money market rates like the federal funds rate and the Secured Overnight Financing Rate, will loom large in the Fed’s thinking. They also believe the Fed may be more cautious about testing how far it can go with running down the balance sheet relative to the view of primary dealers ahead of the December policy meeting, saying in a note that “we look for the Fed to err on the side of caution” and end QT in June or July before any signs of stress emerge. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, also thinks QT will end sooner than the survey suggests based on the meeting minutes. “There is now a compelling argument that the balance sheet rundown will be ended prior to the first cut of the cycle,” he said in a note to clients. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Today in notable charts: That’s London consultancy Drewry’s index tracking the cost of container shipping worldwide. It’s up more than 60 per cent this week, as readers can see, thanks to continued Houthi attacks in the Red Sea and ongoing diversions of container ships. The regional pressures become obvious in the underlying data: The cost of shipping containers from Shanghai to Europe (Rotterdam or Genoa) has more than doubled, according to Drewry. Container-shipping costs from Shanghai to New York or Los Angeles are up closer to 30 per cent. It could be worse. Some spot rates cited on Maersk’s website have more than tripled since October, JPMorgan said in a note this week. Most large Maersk customers won’t face that price increase outright since their rates are decided in contracts, the analysts wrote, but smaller customers are exposed. And the new (old) route around Africa is nevertheless adding 10 days to containerships’ journeys: Carriers re-routing ships around Africa indicates that a quick fix is considered unlikely (otherwise they would wait in the Red Sea) and indeed disruption has now been ongoing for over a month.Thursday’s detonation of an unmanned one-way surface vessel by Houthi rebels, described by mainFT as “a defiant escalation”, doesn’t engender confidence that the conflict is nearing an end. Or as RaboResearch wrote in a note last month: Welcome to how the world used to work before British, then US, naval supremacy. This is what a multipolar world is going to look like, if we see one.So what does it mean for the economy? Well, first of all, spot rates don’t make as big of a difference for inflation as some might fear. Large retailers usually lock in freight costs ahead of time, and hedge their exposure as well. But JPMorgan adds two caveats.First, when rates dropped sharply, freight partners did in some cases renegotiate contracted rates down, meaning that upward renegotiations could be possible in the current scenario (carriers may ask for disruption surcharges for example). Second, many container shipping customers (including retailers) agree 12 months contracted rates on Asia-Europe, with many these renegotiated on a calendar year basis. We understand that some customers were previously delaying agreeing new contracts as spot rates weakened. In other words, the immediate impact on inflation and retailers’ margins should be small. But “bargaining power on contract negotiations has now firmly moved in favour of carriers,” the analysts wrote, and cost pressures will increase if/as the conflict drags on. Oh, and the Red Sea and Suez Canal aren’t the only pain points for container shipping! A severe drought in the Panama Canal also delayed shipping and raised freight costs late last year. Analysts at Bank of America gamed out the doomsday scenario in December. They looked at the possible consequences if both the Panama and Suez Canals become impassable. The two passages handle 8 per cent and 28 per cent of global container volumes, respectively: The Panama Canal and Suez Canal, key chokepoints for global trade, are causing delays, diversions, and higher freight rates. Drought has cut Panama Canal transits, while rocket attacks recently drove Maersk and others to pause Red Sea transits. Our Shipping Equity Research team pointed out that these bottlenecks will impact container trade most, with 8.1% of global container volume traversing the Panama Canal and 28% flowing through the Suez. A closure of these key thoroughfares would boost container demand by 1.5% and 7% respectively. For tankers and bulkers, the closure of the Suez Canal would add roughly 30% to transit distances and boost fleet demand between 1-2%, according to their estimates. Longer supply lines tie up more vessels, boost freight rates, widen origin-destination spreads, and lift bunker demand. Furthermore, a worsening supply chain may be bullish goods demand as companies over-order to ensure adequate inventories. In other words, supply-chain disruptions are BACK IN for 2024. JPMorgan’s economists said rising freight costs could help keep global core inflation “near 3%, which won’t resolve the immaculate disinflation debate”. It was fun while it lasted though. More