Aurelia Butler

LONDON (Reuters) – After huge rallies fed by blockbuster commodity price surges, the tide may be turning for currencies such as the Aussie dollar and Colombian peso as fears of a global growth slowdown take hold in markets.As inflation and higher borrowing costs crimp business and consumer spending, the International Monetary Fund and World Bank this week slashed global growth forecasts by nearly a percentage point and flagged the risk of further drops stemming from China’s COVID lockdowns and sanctions on Russia. The warnings knocked prices of oil and metals, though tight supply of most commodities has so far capped losses. Brent crude futures remain above $100 a barrel while the Refinitiv CRB commodity index is still up nearly a quarter this year.Eight of the top 30 currency performers this year in a group monitored by Societe Generale (OTC:SCGLY) are commodity-linked. In a smaller G10 grouping, four of the top five are from commodity exporting countries, Refinitiv data shows. Societe Generale strategist Kenneth Broux reckons however, that the rally is “running on fumes” with a big test for commodity currencies coming from U.S. real yields – or inflation-adjusted 10-year Treasury yields – turning positive this week for the first time in two years.Central banks are also polishing their hawkish credentials, especially the U.S. Federal Reserve.A BofA investor survey this week predicted the Fed would hike rates more than seven times this year, up from four times in a March survey. Anticipation of the resulting growth slowdown may be already taking the edge off commodities and commodity currencies such as the Australian dollar, which rose 10% versus the greenback between end-January and late-March. The Brazilian real has gained 18% this year and the Colombian peso 8%. “Long Latin American energy exporters and short Asian importers” has been this year’s most concentrated foreign exchange trade, the head of a U.S. bank’s currency desk said.April has brought a turnaround, however. The Chilean peso for example, has shed almost half its first-quarter gains as copper prices ease, while signs of a Chinese slowdown have weighed on the Aussie and Kiwi dollars. Morgan Stanley (NYSE:MS)’s proprietary FX positioning tracker, calculated off client option market positions, reflects the shift, said James Lord, the bank’s global head of foreign exchange.”Usually exchange rates tend to be very correlated and tend to go in the same direction, but we have seen a huge decoupling between commodity exporting and importing currencies since the start of the year,” Lord said. On Morgan Stanley’s scale of minus 100 to plus 100, where 0 is neutral, positioning on commodity currencies reached 75 in March, the highest according to data going back to 2014. The score has since eased, albeit to a still-bullish 62.”Commodity exporters’ currencies may start to weaken from here because global growth is slowing,” Lord said, noting that extreme positioning means there were “a lot of flows that can go the other way”.LOT OF OPTIMISMThe catalyst could be China. The yuan, crucial to the trajectory of commodities, has fallen to a two-month low against a basket of currencies and a Reuters poll shows analysts are “short” yuan for the first time since October.. With swathes of China under COVID lockdowns, a gauge of hedge fund positioning compiled by the U.S. CFTC shows a sharp decline in Aussie dollar net longs – currently $2.1 billion versus six-year highs of about $6.5 billion in January. Brazilian real net longs have held up better, though they too are off early March’s record highs of nearly $1 billion. Hedge funds have also stopped buying the kiwi and the Canadian dollar, the data shows. If growth does slows sharply, currencies’ exalted valuations will be hard to justify – the Norwegian crown’s value on a trade-weighted basis is near its highest, relative to its median value, for the last 50 years. The Aussie and Kiwi dollars are also well above historic averages on a trade-weighted basis, according to Refinitiv data.Current exchange rates are pricing a lot of bullishness, said Francesca Fornasari, head of currency solutions at Insight Investment, noting for instance “when it comes to the Aussie, there is a lot of optimism baked in about China, commodity markets and the central bank rate trajectory.” More

WASHINGTON (Reuters) -A half-point interest rate increase “will be on the table” when the Federal Reserve meets on May 3-4 to approve the next in what are expected to be a series of rate increases this year, Fed Chair Jerome Powell said Thursday in comments that pointed to an aggressive set of Fed actions ahead.With inflation running roughly three times the Fed’s 2% target, “it is appropriate to be moving a little more quickly,” Powell said in a discussion of the global economy at the meetings of the International Monetary Fund. “Fifty basis points will be on the table for the May meeting.”In likely his last public remarks before the Fed’s next session, Powell also said he felt investors currently anticipating a series of half-point hikes were “reacting appropriately, generally,” to the Fed’s emerging fight against rising prices.His comments appeared to pin down an expected rate path much steeper than projected at the Fed’s March meeting, when policymakers at the median anticipated the target overnight federal funds rate would be increased to 1.9% by year’s end.Traders in contracts linked to the overnight federal funds rate currently expect the Fed to increase it to a range between 2.75% and 3% by then, a pace that would involve half-point hikes at three upcoming meetings and quarter-point increases at the year’s three other sessions.That would take the Fed’s target rate beyond the “neutral” level and into territory that would begin to restrict economic activity, marking one of the faster turnarounds of U.S. monetary policy. In addition, the Fed is expected to begin reducing its asset holdings in a step that will further tighten credit conditions for businesses and households.RECESSION FEARThe potential speed of the Fed’s action has led some economists to warn a recession may now be more likely if business and households cut back spending more than anticipated as borrowing costs rise, or stock and other assets prices drop in value and eat into household wealth.”I would put the probability that we enter into a recession over the next 12 months of about one in three, and that is rising,” Moody’s (NYSE:MCO) Analytics’ chief economist Mark Zandi said earlier Thursday at a session on inflation that Powell also addressed.With aggressive rate hikes and balance sheet reductions ahead, “it’s raised the risks that the Fed navigating things gracefully, and landing…the economic plane on the tarmac, is going to be much more difficult.”The interest rate on the 2-year Treasury note, the maturity most sensitive to expectations about Fed policy, rose above 2.7% for the first time since December 2018. Rising yields on both short- and long-term bonds are increasing costs for a variety of loans — most notably the 30-year mortgage commonly used to finance home purchases, where the average rate rose to over 5% this week — a key channel through which the Fed influences the economy.Equities, meanwhile, added to their losses as Powell spoke. The benchmark S&P 500 Index was last down about 1.2%.Powell acknowledged the Fed was walking a sensitive line between taming inflation and pushing the economy into a downturn.”Our goal is to use our tools to get demand and supply back in synch…and do so without a slowdown that amounts to a recession,” Powell said. “It is going to be very challenging.””Powell is intimating that avoiding a recession will not be easy. That is new,” said Tim Ghriskey, senior portfolio strategist with Ingalls & Snyder in New York.But undercutting the rapid pace of price increases, which have more than offset wage gains for most Americans and become a pressing political issue as well, is “absolutely essential” Powell said. “Economies do not work without price stability.”Until recently, the central bank had expected inflation to ease with some outside help, as the reopening of the economy from the pandemic allowed the flow of goods around the world to move back to normal. Instead, new lockdowns in China and the war in Ukraine have threatened a new round of bottlenecks, higher energy costs, and uncertainty.Powell said the Fed no longer expects any help, but will count on tighter monetary policy to curb demand for goods and services, and prompt businesses to reduce the demand for workers in an “unsustainably hot” job market.”We have had an expectation that inflation would peak around this time and come down over the course of the rest of the year and then further,” Powell said. “These expectations have been disappointed in the past…We are not going to count on help from supply side healing. We are going to be raising rates.” More

LONDON (Reuters) – China has committed to joining Zambia’s creditor committee, International Monetary Fund managing director Kristalina Georgieva said on Thursday, amid complaints from Zambia’s finance minister about delays to its debt restructuring.People’s Bank of China governor Yi Gang said that China intended to co-chair the committee, two sources with knowledge of the International Monetary and Finance Committee meeting told Reuters.Zambia became the first pandemic-era default in 2020 and is buckling under a debt burden of almost $32 billion, around 120% of GDP.”We were very pleased to hear from Governor Yi Gang… a very specific commitment to join the creditor committee on Zambia and work expeditiously for debt resolution,” said Georgieva at the International Monetary Fund (IMF) Spring Meetings.She added that he had also committed to the Common Framework debt restructuring process, launched by the Group of 20 (G20) leading economies in 2020 in response to the coronavirus pandemic.Zambia’s finance minister Situmbeko Musokotwane said at public events on Thursday that the debt restructuring process had “stalled” and that the Zambian team had “come here to complain”.An IMF spokesperson said that they did not have any more details of Yi’s statement, noting that it was at a closed door meeting.”This augurs well, for coordination, in resolving debt for various African countries,” Zimbabwe’s finance minister Mthuli Ncube tweeted of the Chinese position.Ethiopia and Chad also signed up to the Common Framework more than a year ago and have yet to receive debt relief.”China is a very significant lender to many of these low-income countries, and China needs to participate, along with the Paris Club and private creditors,” U.S. Treasury Secretary Janet Yellen said at a press conference before Georgieva’s.”I’ve called on China to specifically for example participate right away in a meeting for Zambia, that wishes to undergo debt restructuring. And I am hopeful that China will agree to play a more constructive role.”China and Chinese entities held $5.78 billion of Zambia’s debt at the end of 2021, according to the most recent Zambian government data. More

Malpass told a World Bank conference on Ukraine’s financial assistance needs that the early estimate of “narrow” damage costs does not include the growing economic costs of the war to Ukraine.”Of course the war is still ongoing, so those costs are rising,” Malpass said. More

Zelenskiy, in a virtual address to a World Bank forum, said the global community needed to exclude Russia immediately from international financial institutions, and urged all countries immediately to break up relations with Moscow. He said the Russian blockade of Black Sea ports has blocked Ukrainian exports, impacting world food safety. More