Monday, 31 July 2017

Dollar steady near 13-month lows; data eyed

LONDON (Reuters) - The dollar held near a 13-month low against a basket of currencies on Monday, weighed down by political uncertainty and increased short positions, but markets were wary of pushing it lower before data due later this week.

Broad market positioning data for the week of July 25 showed short bets against the dollar swollen to their highest levels since a "taper-tantrum" peak in early 2013.

"Our short-term positions indicators are flashing red in terms of extreme bets against the dollar, especially against the euro and the Aussie and in this kind of environment, a small negative surprise in data elsewhere can trigger a washout," said Viraj Patel, an FX strategist at ING in London.

Shorting the dollar has been a popular trade this year as deepening U.S. political uncertainty has kept the greenback on the defensive.

Against the euro, the dollar has weakened more than 11.5 percent so far this year, according to Thomson Reuters data. But with euro zone inflation data on Monday seen well below European Central Bank estimates, a risk for a pull-back is rising.

Central bank policy decisions are also due from Australia and the United Kingdom this week with U.S. jobs data scheduled on Friday.

The dollar index, which tracks the U.S. currency against a basket of six major rivals, rose 0.2 percent to 93.450, trimming some losses after dropping 0.6 percent on Friday. It fell to its lowest level since June 2016 on Thursday.

The pound was little changed at $1.3107 and in close reach of a 10-month high of $1.3159 scaled on Thursday. Sterling has been buoyant against the broadly weaker dollar, supported by hopes that Britain will exit the European Union under a transitional deal.

Reference: Saikat Chatterjee

China will crack down on forex irregularities in second half - FX regulator

BEIJING (Reuters) - China will continue to crack down on foreign exchange irregularities in the second half, the country's forex regulator said on Friday, adding that support will be provided for domestic companies for their legitimate outbound investments.

China will also safeguard and increase the value of the country's forex reserves in the second half of this year, said The State Administration of Foreign Exchange, following a internal meeting.

WASHINGTON (Reuters) - The International Monetary Fund on Friday said that the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals, while it viewed valuations of the euro, Japan's yen, and China's yuan as broadly in line with fundamentals.

The IMF's External Sector Report - an annual assessment of currencies and external surpluses and deficits of major economies - showed that external current account deficits were becoming more concentrated in certain advanced economies such as the United States and Britain, while surpluses remained persistent in China and Germany.

While the report assessed the euro's valuation as appropriate for the eurozone as a whole, it said the euro's real effective exchange rate was 10-20 percent too low for Germany's fundamentals, given its high current account surplus.

Britain's pound, meanwhile, was assessed as up to 15 percent overvalued compared to fundamentals, which include a high level of uncertainty over Britain's post-Brexit trading relationship with the European Union.

The Fund said the dollar's appreciation in recent years was based on its relatively stronger growth outlook, interest rate hikes versus looser monetary policy in the eurozone and Japan, as well as expectations for fiscal stimulus from President Donald Trump's administration.

But so far this year, the dollar index, .DXY the broad measure of its value against other major currencies, is down more than 8 percent this year and is off to the worst start to a year since 2002.

The IMF recommended that U.S. authorities take steps to shrink a current account deficit that remains too large, by reducing its federal budget deficit and passing structural reforms to increase the savings rate and improve the economy's productivity.

"It's important to address imbalances, because if they're not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism," IMF Research Division Chief Luis Cubeddu told a news conference.

Cubeddu said that the persistence of current account surpluses in export countries such as China and the growth of deficits in debtor countries such as the United States suggested that the problem would not clear up automatically.

"That is, prices, savings and investment decisions don't seem to be adjusting fast enough to correct imbalances. This partly reflects rigid currency arrangements, but also certain structural features, like inadequate safety nets, barriers to investment, which leads to undesirable levels of savings and investment," he said.

The report said that while China's yuan was broadly in line with its fundamentals, IMF models showed wide divergences with desired policies from a 10 percent overvaluation to a 10 percent undervaluation due to uncertainties over Beijing's policy outlook.

The U.S. Treasury in April refrained from declaring China a currency manipulator despite Trump's campaign promises to do so, citing Beijing's interventions last year to prop up the yuan's value in the face of capital outflows. But it kept China, South Korea, Taiwan, Germany and Switzerland on a monitoring list for large external surpluses.

The IMF said China's current account surplus was growing again after declining in 2015 and 2016 and needed to be reduced. This should be achieved by rebalancing the economy away from investment and credit growth toward more consumption, with a stronger safety net, reforms to state-owned enterprises and opening Chinese markets to foreign competition.

The report also showed that the IMF considers Mexico's peso and South Korea's won both to be undervalued by 5-15 percent compared to their fundamentals. The Fund said it expects Mexico's undervaluation to reverse as risks of protectionist U.S. policies dissipate, but South Korea needed to stimulate domestic demand to reduce a large current account surplus.

Reference: David Lawder

Friday, 28 July 2017

Asian shares pull back after U.S. techs knocked off highs

TOKYO (Reuters) - Asian stock markets sagged on Friday after U.S. tech shares retreated from recent rallies, though optimism about U.S. corporate earnings and the global economy underpinned overall sentiment.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.8 percent but was still on track for a 0.4 percent weekly gain, with Samsung Electric, Asia's largest company by market capitalization, dropping 3.5 percent.

Japan's Nikkei shed 0.4 percent.

On Wall Street, the Dow industrials set a record closing high, helped by a 7.7 percent jump in Verizon, following the top U.S. wireless carrier's quarterly earnings.

But investors were spooked by a sudden drop in technology and transportation shares. The S&P 500 technology sector fell 2.0 percent at one point before ending the day down 0.8 percent.

After the bell, shares - up nearly 40 percent this year - fell 3.0 percent after the online retailer reported a slump in profits.

U.S. stock futures also dipped 0.3 percent in Asia.

"U.S. hi-tech shares have seen a spectacular rally in the past month. Few investors would have imagined that. I think it is quite natural to see some profit-taking in the short term," said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

Overall, investors' sentiment remained solid on the back of upbeat corporate earning results and a bright global economic outlook.

"Given the Dow is hitting a record high, it's hard to think market sentiment has suddenly changed," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

The S&P 500 index is on track to post back-to-back, double-digit quarterly earnings growth for the first time in almost six years.

U.S. durable goods orders, released on Thursday, surged 6.5 percent last month, the biggest gain in three years

The bullish report came on the eve of the government's advance second-quarter gross domestic product estimate on Friday.

Economists expect the data to show growth picking up to 2.6 percent from 1.4 percent in January-March.

A series of Japanese economic data released on Friday came in stronger than expected, with household spending rising more than forecast and the jobless rate unexpectedly falling.

MSCI ACWI, a gauge of the world's 47 stock markets in dollar terms, hit a record high on Thursday, having gained 2.8 percent so far this month.

If the gains are sustained by month-end it would mark the biggest monthly jump in a year and the ninth consecutive month of increases - the longest such spell since 2003-04.

In the currency market, the dollar regained some footing after slumping to a 13-month low against a basket of major currencies the previous day when the U.S. Federal Reserve's policy statement led to the perception that it has grown cautious about soft inflation.

The euro consolidated at $1.1687, after hitting a 2 1/2-year high of $1.1777 on Thursday.

The dollar stood around 111.10 yen, a tad above Monday's low of 110.625, its lowest in more than five weeks.

The biggest mover in the currency market was the Swiss franc, which fell 0.5 percent against the dollar and 0.6 percent versus the euro, due partly to expectations that the Alpine country is likely to keep easy monetary policy even as the European Central Bank looks to dial back its stimulus.

The euro broke out of its long-held range against the franc this week, rising to 1.1348 franc, its highest since the Swiss central bank had abandoned the peg of the Swiss currency to the euro in January 2015.

On the week, it is up 3.0 percent, also the biggest gain since early 2015.

Oil prices held near eight-week highs hit on Thursday, supported after key OPEC members pledged to reduce exports and the U.S. government reported a sharp decline in crude inventories.

Brent crude futures fetched $51.43 per barrel, down slightly in Asia after having climbed to $51.64 on Thursday.

Reference: Hideyuki Sano

Sterling hits ten-month high as dollar dips on Fed

LONDON (Reuters) - Sterling hit a 10-month high against a broadly weaker dollar on Thursday, after the U.S. Federal Reserve left policy unchanged and appeared less confident about inflation picking up, which investors took as a sign rates could be kept low for longer.

The market focused on the central bank's noting that both overall and core inflation had declined, and its removal of the qualifier "recently," which they saw as potentially reflecting concerns that a slowdown in consumer price rises might not be temporary.

With the dollar skidding across the board, the pound took advantage, hitting as high as $1.3157, its highest since mid-September. By 0810 GMT on Thursday it had eased back to $1.3138, up 0.1 percent on the day, but that still left it around 1 percent stronger than before the Fed.

"Coupled with ongoing political woes, even a slightly dovish Fed’s tilt is currently more than enough for markets to continue capitulating on the dollar and rotating further away from (it)," said ING chief EMEA currency strategist Petr Krpata.

Against the euro, it has been a different story for sterling. As the single currency has rallied both on dollar weakness and expectations that the European Central Bank will tighten monetary policy last year, the pound has fallen to eight-month lows in recent weeks.

It was slightly higher on Thursday but still less than a cent away from that low, at 89.18 pence per euro.

"Last year’s high at 93 pence remains possible, however a break below 89 pence could well open up a move back to the support at 88.70/80 in the short term," said Michael Hewson, CMC Markets strategist.

Data on Wednesday showed Britain's economy gathered only a little speed in the second quarter after almost stalling at the start of the year, pouring cold water on expectations for UK interest rate hikes in the coming months.

Growth of 0.3 percent on the quarter was up from 0.2 percent in the first three months of the year, in line with forecasts. But that figure is likely to cement expectations that the Bank of England will keep interest rates on hold next week at their record low level, when they also release a quarterly Inflation Report.

Strategists say developments around Brexit will continue to be the main driver for the pound, which has fallen around 13 percent against the dollar since last June's referendum.

Reference: Jemima Kelly

Thursday, 27 July 2017

Dollar licks wounds at 13-month low after Fed inflation view

TOKYO (Reuters) - The dollar licked its wounds at 13-month lows against a basket of major currencies on Thursday after the U.S. Federal Reserve's more cautious wording on the inflation outlook bolstered views it might not hike interest rates again this year.

While the Fed said it expected to start shrinking its massive holdings of bonds "relatively soon", a phrase taken by many to mean an announcement in September, the central bank also noted weakness in U.S. inflation more explicitly than before.

That recognition of soft inflation from the Fed, which had in the past judged the weakness as transitory, added to expectations that the Fed's plan to raise interest rates a third time this year might be delayed.

"Even though the U.S. economy is strong, inflation is weak. Markets want to see more signs of inflation before they are convinced about future rate hikes," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

"I also suspect people want to take stock of the impact of the likely reduction of the Fed's balance sheet," she added.

The dollar's index against a basket of six major currencies slumped to 93.26. It has fallen more than 10 percent from its 14-year high of 103.82 set on Jan 3.

The next support levels are seen at 93.019, its June 2016 low, and 91.919, a 16-month low touched in May 2016. A break of these could be seen as major bearish signals.

Although the dollar had been supported by the Fed's gradual policy tightening since late 2015, its perceived interest rate advantage is eroding as many other central banks have started to look to wind back their stimulus in recent months.

European Central Bank President Mario Draghi signaled in June that it could tweak its asset purchases, prompting investors to flock to the euro.

The euro rose to as high as $1.1777, hitting its highest level since January 2015. It last stood at $1.1755, up 0.2 percent from late U.S. levels.

The Canadian dollar, which has been helped by the Bank of Canada's rate hike earlier this month, hit a two-year high of C$1.2415 to the U.S. dollar on Wednesday and last stood at C$1.2436.

The British pound fetched $1.3146, reaching its highest level since September, while the Australian dollar reclaimed the $0.80 mark for the first time since 2015 and last stood at $0.8054 for a gain of 0.6 percent.

The dollar also slipped 0.2 percent to 110.90 yen , edging near 110.625, its 5 1/2-week low touched on Monday.

Although Fed policymakers have said another interest rate hike is likely by the end of year, Fed funds rate futures are pricing in slightly less than a 50 percent chance of a rate hike by December, compared to a little over 50 percent before the Fed's meeting.

But some players also said the market may have over-reacted to the Fed's latest statement.

"I think the Fed just fine-tuned its message to keep it in line with the reality, rather than trying to telegraph a message that it is going to delay its rate hike," said Kazushige Kaida, head of foreign exchange at State Street Bank and Trust's Tokyo Branch.

Reference: Hideyuki Sano

(Reuters) - U.S. stock indexes were poised to open at record levels on Wednesday following a set of strong quarterly earnings, led by Boeing and AT&T, while investors awaited the outcome of a two-day Federal Reserve meeting.

Although the central bank is not likely to raise interest rates, it is expected to discuss its monetary policy stance and the timing of a long-awaited balance sheet reduction. The Fed's statement is due at 2 p.m. ET (1800 GMT).

"Many questions still remain unanswered over both the timings and pace of rate hikes, which may weigh on the minds of Fed watchers ahead of the rate decision," said Lukman Otunuga, analyst with FXTM.

"Any unexpected surprises from the policy statement may come in the form of inflation concerns as the central bank acknowledges the fall in inflation and the impact it has on reaching its 2 percent inflation target."

The S&P and the Nasdaq closed at record highs on Tuesday, while the Dow hovered around record levels, helped by well-received reports from big names, including McDonald's  and Caterpillar .

The market's record run has left equities relatively expensive and investors are counting on earnings to justify the valuations.

Earnings of the S&P 500 companies are expected to have climbed 9.1 percent in the second quarter, up from an 8 percent rise estimated at the start of the month, according to Thomson Reuters I/B/E/S.

The S&P 500 is trading around 18 times earnings estimates for the next 12 months, well above its long-term average of 15 times.

Facebook, Gilead Sciences, O'Reilly Automotive report results after the bell.

Dow e-minis 1YMc1 were up 71 points, or 0.33 percent, with 16,260 contracts changing hands at 8:20 a.m. ET.

S&P 500 e-minis ESc1 were up 4.5 points, or 0.18 percent, with 123,297 contracts traded.

Nasdaq 100 e-minis were up 12.75 points, or 0.21 percent, on volume of 17,844 contracts.

Shares of Advanced Micro Devices  jumped 9.4 percent after the chipmaker raised its full-year revenue expectations.

Beverage maker Coca-Cola  pared early gains to trade up 0.1 percent after its quarterly profit dropped 60 percent.

Boeing (BA.N) rose 3.3 percent after reporting a quarterly profit, compared with a loss a year earlier, and the planemaker raised its full-year core profit forecast.

Ford Motor (F.N) fell 1.9 percent after the automaker warned that its full-year automotive operating margin and cash flow would be lower than in 2016.

AT&T was up 3.2 percent after the wireless carrier's quarterly profit topped estimates.

Amgen was down 2.5 percent after the biotechnology company's sales for an infection fighter drug came in below expectations.

Reporting by Tanya Agrawal

Wednesday, 26 July 2017

The Cat Who Aspires To Be A Pilot

Fed expected to leave rates unchanged; balance sheet in focus

WASHINGTON (Reuters) - The Federal Reserve is expected to hold interest rates unchanged on Wednesday and possibly hint that it will start winding down its massive holdings of bonds as soon as September in what would be a vote of confidence in the U.S. economy.

The U.S. central bank will issue its latest rates decision following the end of a two-day policy meeting at 2 p.m. EDT. Economists expect the Fed's benchmark lending rate to remain in a target range of 1.00 percent to 1.25 percent.

That would mark another pause in the monetary tightening campaign that the Fed began in December 2015. The central bank has raised rates twice this year, including at its last policy meeting in June.

Wall Street analysts see little chance the Fed will announce the start of the wind down of its $4.5 trillion balance sheet. However, the Fed's policy statement may provide more visibility on when that might occur.

Citibank economists said in a note to clients that the Fed's rate-setting committee was more likely to say that the trimming would start soon. "(That would) signal that the committee plans to announce balance sheet reduction in September," they said in the note.

Reducing the balance sheet will unwind one of the Fed's most controversial tools used to fight the 2007-2009 financial crisis and its aftermath.

After pushing rates nearly to zero in a bid to boost investment and hiring, the Fed pumped over $3 trillion into the economy through purchases of U.S. Treasury securities and government-backed mortgage debt to further reduce rates. That program drew criticism from Republican lawmakers in Congress.

"The stock markets are generally of a view that the Fed is not in too much of a hurry to normalise monetary policy. So equities would be able to take this Fed meeting in stride if the Fed's statement is in line with such views," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Federal funds futures implied traders saw the chance of a Fed rate increase in September at about 8 percent and a December hike possibility at 48 percent.

A more assertive policy message by the Fed, on the other hand, would likely lift U.S. yields and boost the dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was little changed, but drew mild support after the S&P 500 .SPX climbed to an all-time high overnight on well-received results from McDonald's and Caterpillar in addition to bank share gains.

Australian stocks gained 1 percent with a smaller-than-expected rise in local inflation supporting views that interest rates will remain at record lows for some time to come. The Australian dollar slipped 0.5 percent to $0.7896 AUD=D4.

Japan's Nikkei .N225 added 0.5 percent after the dollar rallied against the yen JPY= overnight to pull away from seven-week lows.

Shanghai .SSEC shed 0.4 percent on lingering fears of further regulatory tightening, while South Korea's KOSPI .KS11 lost momentum after touching a record high the previous day and slipped 0.3 percent.

The dollar regained some ground against major currencies in the previous session after U.S. Treasury yields jumped the most in almost five months in response to Wall Street's rise and on reduced demand for safe-haven bonds. [US/]

But the greenback remained hobbled by uncertainty about the progress of healthcare reforms and the prospect of further delays for President Donald's Trump's ambitious stimulus and tax reform polices.

U.S. Senate Republicans narrowly agreed on Tuesday to open debate on a bill to end Democratic President Barack Obama's signature healthcare law, but it still faces significant hurdles.

Indeed, the first of many expected votes this week on repealing or replacing elements of Obamacare failed to get the 60 votes needed for approval Tuesday night.

The dollar has also been kept in check by political uncertainty as lawmakers investigate possible meddling by Russia in the 2016 presidential election and whether there was any collusion by Trump's campaign.

The euro was effectively flat at $1.1639 EUR=, pulling back from a two-year high of $1.1712 hit on Tuesday on a stronger-than-expected German Ifo business survey.

Expectations that the European Central Bank would begin phasing out its easy monetary policy sooner rather than later have supported the common currency this month.

The dollar index against a basket of major currencies was little changed at 94.143 .DXY, after managing to put some distance between a 13-month low of 93.638 plumbed on Tuesday.

The dollar was steady at 111.905 yen  after surging about 0.7 percent overnight.

"The dollar continues to lack clear direction against the yen. Uncertainty towards U.S. politics is capping the pair. But 'risk on' is also taking place in equities thanks to good corporate results, so dollar/yen is not headed for a big slide either," said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities.

In commodities, crude oil extended its surge after jumping overnight on data showing a sharp fall in U.S. crude stocks last week.

U.S. crude rose 1 percent to $48.38 a barrel and Brent added 0.8 percent to $50.62 a barrel

Gold struggled as improved investor risk appetite curbed the precious metal's appeal. Spot gold XAU= was 0.15 percent lower at $1,246.52 an ounce following its ascent to a one-month peak of $1,258.79 on Monday.

Reference: Kim Coghill and Lisa Twaronite

Sterling stalls above $1.30

LONDON (Reuters) - Sterling steadied just above $1.30 on Tuesday, unable to break out against a broadly weaker dollar as worries over Brexit and the pace of UK economic growth swirl.

The pound recovered from its worst week against the euro in nine months on Monday as investors took profit on gains for the single currency and ministers talked up a transitional deal to smooth Britain's exit from the European Union.

But a cut in the IMF's growth forecast for this year for the world's fifth biggest economy underlined the risk that Britain will struggle in the years ahead as a housing price boom stalls and companies shift operations to mainland Europe.

The pound inched down 0.1 percent in early deals in London to trade at $1.3016, around a cent off 10-month highs hit a week ago as the greenback weakened globally. It fell almost 0.2 percent to 89.44 pence per euro.

"Overall the Cable (dollar) rate has struggled to sustain rallies above $1.3000, weighed down by recent softer UK inflation readings and ongoing worry over the outlook," said LMAX Exchange analyst Joel Kruger.

"Still, while broad based dollar selling persists, any setbacks in the UK currency should be able to find decent support."

The trends survey from business lobby CBI is due later on Tuesday, to be followed on Wednesday by the first estimate of second quarter gross domestic product.

A speech by Bank of England chief economist Andy Haldane at 1700 GMT will also be closely watched at the end of the UK business day.

The flip by Haldane, previously a strong supporter of loose monetary policy, to back a rise in interest rates later this year, was one of the triggers for a rise in UK short-term forward interest rates - a support for the pound.

But that move has already been questioned by a batch of lower inflation numbers and some bearish output figures that suggest the economy is ill-prepared for tighter monetary conditions.

Reference: Patrick Graham

Tuesday, 25 July 2017

Sterling inches up after worst week against euro in nine months

LONDON (Reuters) - Sterling recovered from its worst week against the euro in nine months on Monday as investors took profit on gains for the single currency and ministers talked up a transitional deal to smooth Britain's exit from the European Union.

The pound lost more than 2.5 percent against the euro last week, hitting an eight-month low of 89.94 pence on Friday, as the single currency rallied on bets the European Central Bank would tighten monetary policy next year.

Though the pound had been supported in recent weeks by expectations that the Bank of England, too, would raise interest rates in the coming months, policymakers have made it clear that any tightening will be data-dependent.

Weak figures on the British economy last week, therefore, fed doubt that the BoE was getting close to raising rates and the IMF on Monday cut its forecasts for growth this year, citing weakness in the first quarter.

Against that are signs of a softening in the government's approach to Brexit that might protect British industry from the fallout of what many investors worry will be a disorderly departure from the trading bloc.

British trade minister Liam Fox said on Sunday that he backed a transition agreement to smooth Britain's departure and his colleague, business secretary Greg Clark, said he expected it would be discussed later this year.

"It has been quite quiet, but people are paying attention to the Brexit mood music," said a dealer with one international bank in London.

Having reached a 10-month high of $1.3111 last week as the dollar weakened across the board on political worries and falling expectations of another rate hike from the U.S. Federal Reserve this year, sterling gained a third of a cent to $1.3046 on Monday.

Against the euro, it rose 0.6 percent to 89.24 pence per euro.

"The tone is very dollar-bearish at the moment, and the fact that cable (sterling/dollar) is actually marginally lower over the past week tells you a lot," said BNY Mellon currency strategist Neil Mellor.

"Politics seems to be the thing right now – it was underlying economic fundamentals but I think that's starting to sour," he added. "It will be very hard, in view of the data we've had of late, to really justify a further vote for a hike."

Data released late on Friday showed investors cut net short positions - or bets against sterling - to the lowest level since March 2016 in the week to last Tuesday, reflecting a souring of sentiment around the dollar as well as some optimism that the political situation in Britain could stabilise.

"We still expect sterling/dollar to take one further leg up as investors price in the May government accepting a longer-term transition, or as PM May calls it the 'implementation phase,' which will reduce the cliff edge risk for 2019," wrote Morgan Stanley analysts in a note to clients.

"However, the next leg for sale," they continued. "The economy seems headed for a sharp slowdown as investment and consumption both worsen simultaneously... Near $1.33, sterling will turn into a strategic sell."

Reference: Patrick Graham and Jemima Kelly

Federal Reserve now faces prospect of global monetary policy tightening

WASHINGTON (Reuters) - Prospects for tighter monetary policy in Europe and other countries could pose a fresh problem for the Federal Reserve when it meets next week to ponder its plan to reduce its $4.2 trillion bond portfolio purchased after the 2008 financial crisis.

The Fed bought U.S. Treasuries and mortgage-backed securities (MBS) for about six years in a program known as "quantitative easing" which kept interest rates at record lows to spur borrowing and economic recovery.

But at its June meeting this year, as well as raising interest rates for the third time in six months, the Fed also announced a plan to begin by letting $6 billion a month in Treasuries mature without reinvestment and to increase that amount at three month intervals up to $30 billion.

Similarly, the Fed said it would run down its agency debt and mortgage backed securities by $4 billion a month until it reaches $20 billion.

Now, the European Central Bank (ECB) also appears likely to decide later this year on when to scale back its monthly bond purchases. When ECB President Mario Draghi first hinted at the prospect last month, world bond yields rose sharply for a while.

Moreover, Canada's central bank raised interest rates for the first time in seven years this month, and the Bank of England is expected to raise rates next year to combat rising inflation.

Global Turning Point in Monetary Policy ?

The Fed led the way in tightening monetary policy as the global economy recovered from the 2008 recession but must now determine how plans by other central banks' plans may affect their own policy.

While a stronger European economy has been welcomed by the Fed, lessening risks to the global economy, a move by major central banks to all tighten monetary policy simultaneously has not been seen for a decade.

"The effects of ECB tapering are not limited" to euro zone countries, Cornerstone analyst Roberto Perli wrote recently.

Draghi's comments in June drove up 10-year Treasury yields by the most since the U.S. election last November, and a move by the ECB to stop printing money could prompt the Fed to slow its plans for fear that financial conditions would tighten too fast.

When Fed policymakers meet on July 25-26 they will need to decide a start date for reducing their bond holdings or leave more time to evaluate what Fed Governor Lael Brainard recently cited as a possible "turning point" in global monetary policy that may affect economic growth.

The Fed's plan to reduce its portfolio may well push up longer term bond yields, driving up long term borrowing rates for business, and lead to higher mortgage rates for the housing industry.

Analysts have made comparisons to the so-called "taper tantrum" in 2013 when world bond yields jumped after the first signal from the Fed that it might tighten policy.

"Just how sturdy is this recovery in the face of rising long rates? I would be a little more nervous about that," said former Fed research director David Stockton, now a senior fellow at the Peterson Institute for International Economics. "I would not feel any urgency" to reduce the balance sheet for now.

Hurdles Ahead for Fed

Fed officials have said they think the balance sheet reductions should begin soon, and analysts have pinpointed September as the likely month the Fed will stop reinvesting the proceeds it receives as securities mature..

But the minutes of the Fed's June meeting indicated a split between officials ready to start balance sheet reductions in "a couple of months" and those wanting to wait for more economic data.

Since then the number of hurdles for the Fed to jump before tightening policy further has multiplied.

Global long-term bond yields jumped after the ECB indicated it may begin tightening policy last month and may rise again.

Annual U.S. consumer price inflation increased by 1.6 percent in June, the smallest rise since October last year, and year-on-year inflation has been declining since February when it hit 2.7 percent, reducing the need for the Fed to tighten.

And the prospect of the U.S. Congress failing to raise the federal debt ceiling before the Treasury runs out of cash in October has already driven up yields on three-month Treasury bills due to mature on Oct. 19 to 1.17 percent on Friday, near the highest levels since October 2008.

As a result the chances of a third rise in the Fed funds rate this year recently fell below 50 percent, according to CME Group's FedWatch.

Complicating matters more, each central bank has two policy tools in play - a target interest rate, and a massive balance sheet accumulated. Between them, the Fed and ECB own roughly $9 trillion of assets.

Fed Governor Brainard has already pointed out how hard it may be to sort out what it will mean if the ECB starts to scale back its bond purchases at the same time the Fed is both raising short-term interest rates and shrinking its balance sheet.

"I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target," Brainard said.

Reporting by Howard Schneider

Monday, 24 July 2017

Asian shares edge up, buoyant euro holds its gains

SINGAPORE (Reuters) - Asian stocks edged slightly higher on Monday, while the European Central Bank's apparent equanimity at the euro's nearly two-year highs left the dollar languishing.

European markets are expected to open mixed, with financial spreadbetter CMC Markets predicting Britain's FTSE 100 .FTSE to open 0.1 percent lower, Germany's DAX .GDAXI to open little changed, and France's CAC 40 .FCHI to start the day up 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS reversed earlier losses to edge up 0.2 percent.

Chinese bluechips .CSI300 and the Shanghai Composite .SSEC were both up 0.3 percent. Hong Kong's Hang Seng .HSI added 0.5 percent.

But Japan's Nikkei .N225 dropped 0.6 percent, pressured by a stronger yen. Australian shares retreated 0.7 percent and South Korea's KOSPI .KS11 edged down 0.1 percent.

Despite a pullback in Asia-Pacific stocks, sentiment remains solid, said Jim McCafferty, head of equity research for Asia Pacific at Nomura.

"The first three weeks of July have seen continuation of strong first half performance," McCafferty said. "We are just three weeks in to the second half of the year and investors are continuing to like the Asia-Pacific story."

On Friday, global stocks .MIWD00000PUS ended a 10-day winning streak, taking a breather from a rally that had propelled them to a record high in the previous session. The index was flat on Monday.

Wall Street indexes .SPX  ended Friday flat to about 0.15 percent lower, as disappointing earnings from General Electric and energy shares weighed.

European shares also closed lower, with Germany's DAX slumping 1.7 percent, hurt by the euro's strength.

The euro was trading 0.1 percent higher at $1.16715 on Monday, just a whisker below a nearly two-year high of $1.1684 hit earlier in the session.

ECB President Mario Draghi's comments on Thursday, which conspicuously avoided citing the euro's recent strength as a problem, emboldened traders convinced the central bank will begin tapering its bond-buying programme later this year.

"There has been very little back-pedalling on the long euro storyline as dealers continue to place much emphasis on Draghi declining the opportunity to talk down the currency post-ECB minutes," Stephen Innes, head of Asia-Pacific trading at OANDA, wrote in a note.

"And factoring in the expanding U.S. political sinkhole which is weighing on broader USD sentiment, it's unlikely the market has run out of steam," he wrote, adding he expects the euro to test the August 2015 high of $1.1715 "sooner than later".

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, crept higher but remained subdued on Monday.

After touching 93.823, its lowest level since June 2016 early on Monday, it edged up to 93.880, marginally above Friday's close.

The dollar continued to slide against the yen, however, retreating 0.1 percent to 111.020 yen.

Markets are awaiting the Federal Reserve's meeting on Tuesday and Wednesday for an update on its plan to start normalising its balance sheet.

"All eyes will be on the Fed this week, with market participants eager to see if the Fed formally announces the start of its balance sheet normalisation plan or opts to wait until September," Michala Marcussen, global head of economics at Societe Generale, wrote in a note.

"We are in the September camp, but we acknowledge that it is a coin toss between this week's meeting and the next one."

In commodities, oil prices roes on expectations that the joint OPEC and non-OPEC ministerial meeting later in the day would address rising production from Nigeria and Libya, two OPEC members exempted from the cuts, bolstered prices.

However, gains were capped by a consultant's forecast of a rise in OPEC production for July despite the group's pledge to curb output, which led to a plunge in prices on Friday.

Global benchmark Brent crude was up 0.1 percent at $48.10 a barrel, after Friday's 2.5 percent tumble, while U.S. crude edged up slightly to $45.79, after Friday's 2.2 percent slump.

Gold shone on the dollar's weakness and a decline in risk appetite, with spot gold just slightly lower at $1,254.31 an ounce, retaining most of Friday's 0.8 percent jump, and slightly below a one-month high hit earlier.

Reporting by Nichola Saminather

Dollar falls on perceived ECB path, U.S. political roadblocks

NEW YORK (Reuters) - The U.S. dollar hit its lowest level in more than a year against a basket of major rivals on Friday a day after the European Central Bank's chief abstained from talking down the euro, while obstacles to U.S. President Donald Trump's policy agenda also weighed.

ECB President Mario Draghi said on Thursday that financing conditions remained broadly supportive, and noted that the euro's appreciation had "received some attention." However, he did not cite that strength as a problem nor did he directly try to talk the currency down.

Draghi's apparent lack of concern about the strengthening euro convinced traders that the central bank remained on track to potentially begin tapering its bond-buying stimulus later this year.

The dollar index touched 93.854 .DXY, its lowest level since June of last year, and was last down about 0.5 percent at 93.885. The euro touched $1.1682 EUR=, its highest level against the dollar in nearly two years, and was last up 0.4 percent on the day at $1.1674.

"The fact that Draghi didn’t necessarily argue too much against the strength of the euro ... certainly gave the greenlight for individuals to want to own the currency again or actually add to their positions," said Dean Popplewell, chief currency strategist at Oanda in Toronto.

The euro was last on track to gain 1.8 percent for the week, which would mark its second straight weekly rise against the dollar. The dollar index was set to fall 1.3 percent to mark its second straight weekly decline.

Against the yen, the dollar touched more than four-week low of 111.02 yen.

In addition to traders' expectations that the ECB was staying the course toward tightening monetary policy, investigations into alleged Russian meddling in the U.S. election and possible collusion with Trump's campaign were viewed as obstacles to the administration's pro-growth agenda and negative for the dollar.

"Compounding the (weaker dollar) move is this latest news on the political front in the U.S. about the Russia investigation expanding to Trump’s business affairs," said Alvise Marino, FX strategist at Credit Suisse in New York.

"This is on top of the fact that Senate has not been able to pass anything meaningful on the healthcare front," he said in reference to the collapse late on Monday of a Republican effort to overhaul the U.S. healthcare system.

The dollar touched its lowest against the Swiss franc in more than a year at 0.9440 franc .

Reference: Sam Forgione

Friday, 21 July 2017

Sterling skids to eight-month low against rallying euro

LONDON (Reuters) - Sterling skidded to an eight-month low against the euro on Thursday, trading close to 90 pence after the head of the European Central Bank said possible changes to policy would be discussed in the autumn.

Though Mario Draghi said no date had been set for discussing any changes to the programme and that ECB rate-setters had been unanimous in their decision not to change their guidance an monetary policy, investors reckoned discussions in the autumn would lead to monetary tightening next year.

The euro jumped as much as 1.5 percent against the pound, touching 89.765 pence, its strongest since early November.

"Traders may have found that Draghi's comments were less dovish than anticipated, despite his emphasis on the continued need for significant stimulus and on subdued underlying inflation," said Caxfon FX anaylst Alexandra Russell-Oliver.

"Ultimately, the expected winding down of stimulus will likely continue to be supportive of the euro."

Against the dollar, sterling dipped back below $1.30 on concern UK ministers are prepared to walk away from Brexit talks without a deal. That mood of uncertainty outweighed a slightly better-than-expected batch of retail sales numbers.

That briefly helped the pound recover some ground from a fall after Trade Minister Liam Fox said in a radio interview the country could get by without a Brexit trade deal - an outcome many economists have warned could cripple business activity.

"Official comment this morning suggesting the UK can survive with no Brexit deal will likely outweigh (the retail sales numbers) on the pound (and) maintain the downtrend," said Neil Jones, head of hedge fund FX sales at Mizuho in London.

The pound rose above $1.31 to 10-month highs earlier this week as the dollar fell across the board, and as investors bet the 25-basis-point cut in British interest rates after last year's vote for Brexit could be reversed in the coming months.

But BoE policymakers have made it clear that any monetary tightening will be data-dependent.

Thursday's retail sales numbers showed sales rose 2.9 percent in June compared with a year earlier, and 0.6 percent on the month - both beating forecasts in a Reuters poll.

Reference: Patrick Graham and Jemima Kelly

BOJ pushes back inflation target for sixth time, keeps policy steady

TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Thursday but once again pushed back the timing for achieving its ambitious inflation target, reinforcing views that it will lag well behind other major central banks in scaling back its massive stimulus program.

With robust exports and private consumption pointing to a steady though modest recovery, the Japanese central bank slightly raised its growth forecasts and offered a more upbeat view of the world's third-largest economy than last month.

But stubbornly weak price growth forced the BOJ to cut its inflation forecasts, underscoring the challenges the central bank faces as it tries to reflate the economy and coax consumers to spend more.

"Recent price developments have been relatively weak, as companies remained cautious in raising wages and prices," the BOJ said in a quarterly report on its long-term growth and inflation projections.

"Risks to the economy and price outlook are skewed to the downside," it said, conceding it has proved harder than expected to change public perceptions that deflation will persist.

The BOJ pushed back by a year the timing for hitting its ambitious 2 inflation target, in a fresh blow to Governor Haruhiko Kuroda's radical monetary experiment aimed at sustainably ending deflation.

It now expects inflation will not reach that level until sometime in the fiscal year ending in March 2020.

The BOJ has now pushed back the price target timeframe six times since Kuroda launched his huge asset-buying program in 2013.

"The BOJ's hands are tied. Central banks in the United States and Europe are headed toward higher rates and balance sheet reduction, but the BOJ is headed in the opposite direction," said Hiroaki Muto, economist at Tokai Tokyo Research Center.

"The message seems to be the BOJ is prepared to maintain easy policy indefinitely..."

As widely expected, the BOJ maintained its short-term interest rate target of minus 0.1 percent and its 10-year government bond yield target of around zero percent.

The central bank also kept intact guidance that it would keep buying government bonds so its holdings increase at an annual pace of 80 trillion yen ($714 billion).

While companies were facing rising labor costs from a tight job market, many of them were making ends meet by hiring more temporary workers and streamlining operations, the BOJ said.

Such efforts are weighing on wages and prices, creating a disconnect between stronger economic activity and low inflation, it said.

Growth, Price Mismatch

At his post-meeting news conference (0630 GMT), Kuroda is likely to remind markets of the BOJ's resolve to maintain ultra-easy policy until inflation is sustainably above target.

That would put the BOJ far behind the U.S. Federal Reserve, which has been gently raising rates and is expected to announce detailed plans in September to start shrinking its more than $4 trillion balance sheet.

The European Central Bank (ECB) is also expected to announce plans in coming months to taper its asset purchases as growth picks up on the continent, according to a Reuters poll.

Both the Fed and the ECB are also facing stubbornly low inflation that is puzzling policymakers, though levels are not as tepid as Japan's.

In a testament to the improving economy, the BOJ raised its growth projections for the current fiscal year to 1.8 percent from 1.6 percent forecast three months ago, and to 1.4 percent from 1.3 percent for the following year.

"Japan's economy is expanding moderately," the BOJ said, a brighter assessment than last month when it said it was turning toward a moderate expansion.

But it slashed its consumer inflation forecasts for the year ending in March 2018 and the following year, to 1.1 percent from 1.4 percent, and to 1.5 percent from 1.7 percent.

Japan's economy grew at an annualized 1.0 percent in the first quarter thanks to robust global demand and a pick-up in private consumption. Data earlier on Thursday showed its exports rose for a seventh straight month in June.

But core consumer prices in May rose just 0.4 percent from a year earlier, well below the BOJ's 2 percent target.

Reference: Leika Kihara and Tetsushi Kajimoto

Thursday, 20 July 2017

Euro clings to ECB tapering hopes, yen little moved after BOJ

SINGAPORE (Reuters) - Asian shares scaled a near-decade peak on Thursday, bolstered by a surge in global stocks to new records on strong U.S. corporate earnings, while the yen eased slightly after the Bank of Japan reinforced expectations it will lag other central banks in dialling back stimulus.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS added 0.15 percent, hovering near its highest level since December 2007.

Australian stocks rose 0.6 percent and South Korea's KOSPI .KS11 was up 0.1 percent.

Chinese blue chips .CSI300 advanced 0.15 percent, while the Shanghai Composite .SSEC edged up 0.25 percent. Hong Kong's Hang Seng .HSI crept up 0.3 percent.

The MSCI World index .MIWD00000PUS inched up in its 10th straight session of gains on Thursday and set a record high for the sixth consecutive day, lifted by all-time closing highs on Wall Street in the wake of strong earnings reports.

"In the U.S., the earnings season seems to be surprising a little bit on the upside," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

"What we have seen recently in the economic reports suggests it should be even better overseas... So we have come to the point where things look pretty good in the U.S. and it looks even better in prospect overseas, so what's not to like about equities," he said.

The yen weakened slightly after the BOJ pushed back its projected timing for hitting its 2 percent inflation target, as it cut price forecasts until fiscal year 2020.

The Japanese currency slipped 0.2 percent to trade at 112.10 yen to the dollar following the BOJ decision. The weaker yen helped lift the Nikkei .N225 0.4 percent.

The euro was steady at $1.15195 on Thursday, ahead of a meeting of the European Central Bank later in the session.

The common currency hit 14-month high this week following seemingly hawkish comments by ECB President Mario Draghi.

At Thursday's meeting, the ECB may drop a reference to its readiness to increase the size or duration of its asset-purchase programme before announcing in the autumn how and when it will start winding down its bond buying.

"The euro has surged enormously on the back of hopes that the ECB is going to start the process of shutting the door on loose monetary policy," Naeem Aslam, chief market analyst at ThinkMarkets UK, wrote in a note.

"The ECB needs to be clear about its forward guidance and it should reinforce that in a subtle manner. Coming out of the gates too aggressively would create shock waves in the market."

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, was flat at 94.784.

The Australian dollar set a new two-year high on Thursday, still heady from the minutes of the last Reserve Bank of Australia meeting, released Tuesday, which showed the central bank had turned more upbeat on the economic outlook.

It pulled back from that high to trade down 0.15 percent from Wednesday's close at $0.7942.

The Canadian dollar was about 0.1 percent weaker at C$1.2615 to the dollar. On Tuesday, it touched a 14-month high on record domestic factory sales and stronger oil prices.

Oil prices, which hit a two-week peak on Wednesday on a bigger-than-expected weekly draw in crude and gasoline inventories in the United States, were marginally lower on Thursday.

U.S. crude fell 0.1 percent to $47.07 a barrel, after jumping 1.6 percent overnight.

Global benchmark Brent also lost 0.1 percent to $49.64, holding on to most of Wednesday's 1.8 percent gain.

Gold pulled back 0.15 percent to $1,238.55 an ounce on Thursday.

Reference: Nichola Saminather

Asia stocks hit near-decade high, yen slips as BOJ cuts inflation forecast

SINGAPORE (Reuters) - Asian shares scaled a near-decade peak on Thursday, bolstered by a surge in global stocks to new records on strong U.S. corporate earnings, while the yen eased slightly after the Bank of Japan reinforced expectations it will lag other central banks in dialling back stimulus.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS added 0.15 percent, hovering near its highest level since December 2007.

Australian stocks rose 0.6 percent and South Korea's KOSPI .KS11 was up 0.1 percent.

Chinese blue chips .CSI300 advanced 0.15 percent, while the Shanghai Composite .SSEC edged up 0.25 percent. Hong Kong's Hang Seng .HSI crept up 0.3 percent.

The MSCI World index .MIWD00000PUS inched up in its 10th straight session of gains on Thursday and set a record high for the sixth consecutive day, lifted by all-time closing highs on Wall Street in the wake of strong earnings reports.

"In the U.S., the earnings season seems to be surprising a little bit on the upside," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

"What we have seen recently in the economic reports suggests it should be even better overseas... So we have come to the point where things look pretty good in the U.S. and it looks even better in prospect overseas, so what's not to like about equities," he said.

The yen weakened slightly after the BOJ pushed back its projected timing for hitting its 2 percent inflation target, as it cut price forecasts until fiscal year 2020.

The Japanese currency slipped 0.2 percent to trade at 112.10 yen to the dollar JPY=D4 following the BOJ decision. The weaker yen helped lift the Nikkei .N225 0.4 percent.

The euro was steady at $1.15195 on Thursday, ahead of a meeting of the European Central Bank later in the session.

The common currency hit 14-month high this week following seemingly hawkish comments by ECB President Mario Draghi.

At Thursday's meeting, the ECB may drop a reference to its readiness to increase the size or duration of its asset-purchase programme before announcing in the autumn how and when it will start winding down its bond buying.

"The euro has surged enormously on the back of hopes that the ECB is going to start the process of shutting the door on loose monetary policy," Naeem Aslam, chief market analyst at ThinkMarkets UK, wrote in a note.

"The ECB needs to be clear about its forward guidance and it should reinforce that in a subtle manner. Coming out of the gates too aggressively would create shock waves in the market."

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, was flat at 94.784.

The Australian dollar set a new two-year high on Thursday, still heady from the minutes of the last Reserve Bank of Australia meeting, released Tuesday, which showed the central bank had turned more upbeat on the economic outlook.

It pulled back from that high to trade down 0.15 percent from Wednesday's close at $0.7942.

The Canadian dollar was about 0.1 percent weaker at C$1.2615 to the dollar. On Tuesday, it touched a 14-month high on record domestic factory sales and stronger oil prices.

Oil prices, which hit a two-week peak on Wednesday on a bigger-than-expected weekly draw in crude and gasoline inventories in the United States, were marginally lower on Thursday.

U.S. crude fell 0.1 percent to $47.07 a barrel, after jumping 1.6 percent overnight.

Global benchmark Brent also lost 0.1 percent to $49.64, holding on to most of Wednesday's 1.8 percent gain.

Gold pulled back 0.15 percent to $1,238.55 an ounce on Thursday.

Reference: Nichola Saminather

Wednesday, 19 July 2017

Dollar weakness, China cheer lift Asia stocks, commodities

SYDNEY (Reuters) - The dollar huddled near multi-month lows on Wednesday as investors wagered any further tightening in the United States would be slow at best, while optimism on China's economy underpinned Asian shares and commodities.

The U.S. currency was still smarting after the collapse of the Republicans' push to overhaul healthcare dealt a blow to President Donald Trump's ability to pass promised tax cuts and infrastructure spending.

The diminished prospect of fiscal spending was a boon to bonds, especially as a run of soft U.S. inflation readings had lessened the risk that the Federal Reserve would need to be aggressive in removing its stimulus.

"The question marks over U.S. reform on the one hand, and the underlying economic growth momentum on the other hand are likely to keep the U.S. within its current goldilocks scenario for longer," wrote analysts at Morgan Stanley in a note.

"Globally, financial conditions tend to improve when the dollar is weak and vice versa," they added. "The falling dollar – still the globe's major reserve and funding currency – tends to see risk appetite flourishing."

As a result, yields on 10-year Treasury notes were down at 2.27 percent having fallen 12 basis points in little more than a week.

That in turn undermined the U.S. dollar which hit its lowest since September against a basket of currencies .DXY. It was a whisker firmer on Wednesday at 94.790, but still down over 7 percent on the year so far.

The euro was steady at $1.1535 EUR=, having made a 14-month top at $1.1583. Investors were wary of pushing the single currency too far in case a European Central Bank policy meeting on Thursday proved less hawkish than bulls were betting on.

The dollar also carved out a two-year low on the Australian dollar and a one-year trough on the Swiss franc.

Losses have been more limited against the yen as the Bank of Japan has stuck with its massive stimulus campaign and stopped yields there from rising. The dollar was trading at 112.12 JPY= on Wednesday, up from a low of 111.685.

Speculation that the Bank of England might soon tighten was also dealt a blow by surprisingly soft inflation figures at home, giving the dollar a leg up on the pound GBP=.

Remember China

In Asia, investor sentiment has also been supported by a raft of upbeat economic news out of China. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.55 percent at its highest since April 2015.

Shanghai's blue-chip CSI300 index, rose 1 percent and back toward an 18-month peak, while Australia's main index added 0.9 percent. The strength of the yen limited Japan's Nikkei .N225 to a rise of 0.1 percent.

In Europe, futures for the Eurostoxx 50  were up 0.3 percent, the DAX 0.2 percent and FTSE 0.3 percent. E-Mini futures edged up 0.1 percent.

Wall Street had ended Tuesday mixed after a heavy dose of corporate earnings, with the Dow dragged by Goldman Sachs (GS.N) but the Nasdaq reaching a record high.

The Dow .DJI fell 0.25 percent, while the S&P 500 .SPX gained 0.06 percent and the Nasdaq .IXIC 0.47 percent.

The Nasdaq's run of gains was saved by Netflix which jumped 13.5 percent on strong customer numbers. IBM (IBM.N), however, fell 2 percent after the bell when its revenue missed forecasts.

The drop in the dollar and optimism on Chinese demand helped underpin commodities, with everything from copper to iron ore on the rise. Spot gold also added another 0.1 percent to $1.243.36 per ounce

Oil prices eased after a rise in U.S. crude inventories and ongoing high supplies from producer club OPEC revived concerns of a supply overhang.

U.S. crude was last off 22 cents at $46.18 per barrel, while Brent dipped 21 cents to $48.63.

Reference: Wayne Cole

BoE to hold rates along bumpy road to Brexit

LONDON (Reuters) - Above-target inflation won't push the Bank of England to tighten monetary policy this year or next as it waits to see if wage increases catch up with price rises and how divorce talks with the European Union pan out, a Reuters poll found.

Britons voted just over a year ago to leave the EU and envoys on Monday began a first round of negotiations on the terms of the split before Britain departs - with or without a deal - at the end of March 2019.

There is still little lucidity on what tone the talks will take but several Reuters polls over the past few months have concluded that fractious negotiations would be the worst outcome for both Britain's economy and sterling.

"We expect the exit negotiations to be bumpy," economists at Morgan Stanley wrote in a note to clients. "We see MPC action as dependent on economic performance (and) we assume that the economy will slow and keep them on hold despite inflation overshooting the target."

The medians in the poll of economists said the Monetary Policy Committee would hold Bank Rate at its record low of 0.25 percent until 2019. Those forecasters gave, on average, a near one-in-three chance of rates rising before this year is out.

Financial markets have fully priced in a 25 basis point hike by May 2018 but the poll said rates will not rise until 2019, ending that year at 0.75 percent.

Only two of the 80 economists polled in the past few days expect the MPC to tighten policy when it meets on Aug. 3, but they are joined by four others who expect an increase by end-December. The chances of a hike in August are only one-in-five, according the poll.

"Weak GDP and wage growth will keep higher interest rates at bay," said Samuel Tombs at Pantheon Macroeconomics. "Households' real incomes are set to flatline this year."

Consumer spending played a large part in Britain's economic growth last year but workers' pay fell further behind inflation in the three months to May, even as the unemployment rate hit a new 42-year low.

The MPC is watching wage growth closely as it gauges whether the increase in inflation from the fall in the pound becomes more longer-lasting pressure. The BoE expects wages to rise 2 percent this year before picking up in 2018 and 2019.

But that will lag price rises as inflation will average 2.7 percent this year, 2.6 percent next and 2.2 percent in 2019, the Reuters poll found. The MPC targets it at 2 percent.

Inflation hit an almost four-year high of 2.9 percent in May, a bigger increase than economists had expected. Figures due later on Tuesday will probably show prices rose at the same annual rate in June.

Although the predicted recession after Britain voted to leave the bloc never happened, growth slowed sharply at the start of 2017 as consumers felt the hit from rising inflation.

GDP growth is forecast between 0.3 and 0.4 percent through to the end of 2018, barely keeping pace with the euro zone. On an annual basis, the forecasts are for 1.6 percent this year and just 1.3 percent in 2017.

Reference: Jonathan Cable

Tuesday, 18 July 2017

Fed to announce balance sheet unwind in September, hike rates in fourth quarter:

(Reuters) - The U.S. Federal Reserve will announce plans to shrink its more than $4 trillion balance sheet in September, according to a Reuters poll of economists who also said the central bank will wait until the fourth quarter before raising rates again.

Results in the survey are in line with what Fed officials have hinted at in recent weeks, even as they are split on the outlook for inflation and how the lack of it might affect the future pace of interest rate hikes.

"The idea is that they (the Fed) announce balance sheet shrinkage at the September meeting and then hike in December. I think they have almost pre-announced those two decisions," said Ethan Harris, head of global economics at Bank of America Merrill Lynch.

In a poll conducted just last month, predictions were for the Fed to raise rates by September.

But expectations have now been pushed back by a quarter, with the consensus from the latest poll of over 100 economists predicting the fed funds rate to climb to a range of 1.25-1.50 percent by the end of this year.

Financial markets are pricing in only a 43 percent chance of a 25 basis point rate hike in December. That is largely because recent U.S. economic data have been weaker than expected, especially inflation.

The dollar too has taken a beating against a basket of currencies and was last trading near a 10-month low.

The Fed has raised rates twice so far this year.

So while the Fed pauses for the next opportunity to raise rates, about two-thirds of economists say the central bank is expected to announce the course of action it will take to unwind its massive bonds portfolio in September.

Most of those who answered another question in the poll said if the Fed does so, it will not be acting too soon.

But not everyone was convinced.

"We are a little bit concerned that the Fed is getting ahead of itself. We don't agree with the idea that the Fed seems to be selling that balance sheet shrinkage is something we should not be focused on, and it will simply occur in the background," said BofA-ML's Harris.

"In a sense, they are setting aside one of their policy tools on auto-pilot. I don't think they should be doing that."

Only a handful of economists expect the central bank to announce its balance sheet unwinding plan when it meets on July 25-26. The consensus was for the central bank to stand pat on rates too at that meeting.

Inflation Outlook Slips

The labor market remains strong, with the unemployment rate at 4.4 percent. But weak wage growth and cooling inflation will probably keep the Fed wary of raising rates again soon.

The Reuters poll consensus for core PCE inflation, the gauge the Fed closely watches, was 1.5-1.6 percent each quarter from here until the end of the year, slightly lower than 1.6-1.7 percent expected last month.

Growth has not picked up as previously thought either and is now expected to be modest at best for this year and next.

The economy is forecast to have grown at a 2.7 percent pace in the second quarter and then to advance at an annualized rate of 2.2-2.5 percent each quarter to the end of next year, according to the poll median.

Fed Chair Janet Yellen said at a Senate committee hearing last week that it would be "quite challenging" for the United States to reach the 3 percent growth target set by President Donald Trump's administration.

Several Reuters polls this year have been clear that the chances of 3 percent U.S. economic growth this year were low.

While the Fed has been more sanguine than markets about inflation picking up, policymakers will move cautiously.

"Fed officials believe that market participants are under-appreciating the inflation implications of the downtrend in the unemployment rate, and that they have overreacted to some weaker-than-expected inflation data," noted Jim O'Sullivan of High Frequency Economics, the top forecaster for U.S. economic data in Reuters polls in 2016 for the second year in a row.

"However, Fed officials will not follow through on their policy projections if the labor market weakens and the recent slowing in core inflation continues," O'Sullivan wrote in a note.

Reference: Shrutee Sarkar

Dollar languishes at 10-month low, kiwi tumbles after soft inflation

TOKYO (Reuters) - The U.S. dollar sank to a 10-month low against a basket of major currencies on Tuesday, hobbled by uncertainty over the pace of the Federal Reserve's policy tightening and worries that President Donald Trump will fail to deliver healthcare reforms.

The dollar's index against a basket of six major currencies sank to a 10-month low of 94.75. From its 14-year peak of 103.82 touched on Jan. 3, it has lost 8.4 percent.

Two more Republican Senators, Jerry Moran and Mike Lee, announced their opposition on Monday to a revised Republican healthcare bill, delivering a serious blow to the legislation.

"If the bills won't pass, there will be no money for tax cuts. The implementation of his fiscal policy will be difficult," said Bart Wakabayashi, Tokyo Branch Manager of State Street.

Friday's weak reading on U.S. inflation and retail sales also fanned speculation that the Fed may not have justification for another rate hike by the end of this year, despite policymakers' projection for such a move.

Money market instruments are now pricing in less than 50 percent chance of a rate increase during the rest of the year.

In contrast, central bank policymakers in the euro zone, the UK and Canada have recently signalled they could adjust their policies, with the Bank of Canada raising rates last week for the first time since 2010.

"A lot of countries are catching up with the U.S. in terms of tightening in monetary policy. So it is natural that the dollar is losing its advantage," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

The dollar's loss accelerated after the euro rose above a major big number of $1.15.

The common currency rose 0.4 percent to $1.1528, hitting its highest levels since May last year.

The European Central Bank is expected to keep its policy on hold at its rates review on Thursday while many investors expect it to signal a reduction of its stimulus in the following policy meeting in September.

The dollar fell 0.4 percent to 112.30 yen, having lost steam after hitting a near four month high of 114.495 a week ago.

The New Zealand dollar slipped as much as 0.8 percent to $0.7261 after data showed consumer price inflation was flat in the second quarter, below the 0.2 percent expected by analysts in a Reuters poll, and sharply lower from the 1.0 percent posted in the first quarter.

The latest data is likely to reinforce the central bank's view that it is in no rush to hike interest rates.

The kiwi last stood at $0.7315, helped by the U.S. dollar's broad decline.

The Australian dollar gained 1.0 percent to a two-year high of $0.7875 as commodity prices such as iron ore and copper surged following Monday's data showing robust economic growth in China.

China's economy expanded at a faster-than-expected 6.9 percent clip in the second quarter, setting the country on course to comfortably meet its 2017 growth target.

The Canadian dollar scaled a 14-month high of C$1.2627 on Monday before easing a tad on weak Canadian home sales data. It last stood at C$1.2657 per U.S. dollar.

Reference: Hideyuki Sano

Monday, 17 July 2017

Dollar nurses losses, China cheer fuels carry trade

SYDNEY (Reuters) - The dollar huddled near a 10-month trough on Monday as upbeat Chinese news and the prospect of only gradual policy tightening in the United States sent investors piling into leveraged positions in higher yielding currencies and risky assets.

China's second-quarter gross domestic product handily topped forecasts with a rise of 6.9 percent on the year, while retail sale and industrial output were both strong.

"It is encouraging for global growth as well because China is the second largest economy on the planet," said Craig James, chief economist at fund manager CommSec in Sydney.

"Based on this data, there is no need for easing and no need really for tightening either because inflationary pressures are very much contained," he added. "So I think the central bank just continues to be watchful."

Currency charts were already crowded with milestones with the euro near ground last trod in May 2016 and sterling at its highest since September. The pound's 1.2 percent jump on Friday was the largest in three months and left it at $1.3093.

The was hovering at $1.1458 and not far off major resistance at $1.1489. The U.S. dollar index was at 95.212 having touched its lowest since September.

The dollar did regain a little ground on the yen to 112.64, having shed a big figure on Friday on news of surprisingly soft readings for U.S. consumer prices and retail sales.

The repeated disappointment on prices cast a question mark over the Federal Reserve's confidence that inflation would soon rebound.

Slow Motion

"It is a mixed picture that is likely to leave the Fed cautious, and it is little wonder markets have lowered the odds of further rate hikes this year," said ANZ economist David Plank.

"Whether it also delays the start of balance sheet normalisation remains to be seen, but we suspect the Fed will want to push on with that for now."

Fed funds futures imply around a 50-50 chance of another hike by December, and have less than two moves priced in for all of next year. Fed policymakers have pencilled in one more rise this year and a further four in 2018.

The prospect of a slow-motion Fed dragged Wall Street's favoured gauge of fear, the CBOE Volatility index, to its lowest since December 1993.

Such periods of market calm favour carry trades since they lessen the risk of sharp and sudden reversals that would stop investors out of their leveraged positions.

That encouraged flows into higher-yielding currencies, ranging from the Australian dollar to the Mexican peso and South African rand, and into emerging markets stocks.

The Aussie shot to a two-year high and breached major chart resistance in the process in the $0.7700/7778 range. The Aussie was last at $0.7814 with bulls targetting the 200-week moving average around $0.8026.

Reference: Wayne Cole;

Asia shares rise on accommodative Fed, China stocks narrow losses on strong GDP

SINGAPORE (Reuters) - Asian stocks mostly rose on Monday, spurred by record high closes for the Dow and S&P 500 on bets that the Federal Reserve's policy will remain accommodative following lacklustre U.S. data, which sent the dollar reeling to a 10-month low.

Chinese stocks fell over 2 percent in early trade but recouped some of the losses after data showed the economy grew at a slightly faster than expected pace of 6.9 percent in the second quarter thanks to robust industrial output and retail sales.

The CSI 300 .CSI300 was 0.7 percent lower, and the Shanghai Composite. was down 1.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS advanced 0.2 percent on Monday. Japanese markets were closed for a holiday.

Australian shares were 0.3 percent lower, while South Korea's KOSPI .KS11 jumped 0.3 percent.

Wall Street closed higher on Friday, after data showed consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and subdued expectations of strong economic growth in the second quarter.

The chances of a rate hike in December fell to 43.1 percent after the data came out from 55 percent late Thursday, according to the CME Group's Fedwatch tool.

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, hit a 10-month low early on Monday. It was trading flat at 95.156 after losing 0.6 percent on Friday.

"Friday’s U.S. data led to more  USD selling," Stephen Innes, senior trader at OANDA, wrote in a note.

"With less than a 50 percent December rate hike probability priced in, and with no supportive Fed speak on the calendar before July 26th, the dollar could struggle."

U.S. 10-year Treasury yields, however, which fell to as low as 2.279, recovered to end at 2.3319 percent on Friday.

The dollar was also steady at 112.55 yen JPY=D4 early on Monday, after closing down 0.6 percent on Friday.

The Bank of Japan is expected to keep its monetary policy settings unchanged when it meets on Wednesday and Thursday.

The weakness in the dollar saw other currencies soar, with the Australian dollar AUD=D3 hitting its highest level in over two years and the Canadian dollar CAD= touching a one-year high early on Monday.

The Aussie was trading 0.2 percent lower than its Friday close at $0.7813, following a 1.3 percent surge, and the loonie was 0.1 percent weaker at C$1.2654 to the dollar, retaining Friday's 0.6 percent jump.

The euro EUR=EBS slipped slightly to $1.14615, but remained close to its highest in a year hit last week, after gaining 0.6 percent on Friday.

In commodities, oil inched higher, extending last week's gains on signs of lower U.S. inventories and higher Chinese demand.

U.S. crude rose 0.25 percent to $46.67 a barrel.

Global benchmark Brent  added 0.3 percent to $49.07.

The dollar's loss was gold's gain, with the precious metal rising on Friday. Spot gold XAU= was 0.2 percent higher at $1,231.01 an ounce.

Reference: Nichola Saminather

Friday, 14 July 2017

Cautious Fed lifts stocks to record high, investors eye earnings boost

SINGAPORE (Reuters) - Global stocks scaled record highs on Friday, with Asian equities rising for the fifth straight session, as signs the Federal Reserve will pursue a gradual rate tightening path and hopes of a strong earnings season lifted appetite for risk assets.

European stocks are set for a flat to higher open, with spreadbetter CMC Markets expecting Germany's DAX .GDAXI to open little changed, Britain's FTSE 100 .FTSE to start the day up 0.1 percent and France's CAC 40 .FCHI to rise 0.2 percent.

The MSCI World Index .MIWD00000PUS was almost 0.1 percent higher on Friday, just a whisker below an all-time intraday high hit earlier. It is on track to end the week 1.6 percent higher.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS advanced 0.2 percent to its highest level in two years. It's set for a 3.1 percent gain for the week, its biggest since mid-March.

Japan's Nikkei .N225 added 0.2 percent, poised for a weekly rise of 1.05 percent.

Chinese shares reversed earlier losses, with the CSI 300 .CSI300 index rising 0.2 percent and the Shanghai Composite .SSEC flat. Hong Kong's Hang Seng .HSI rose almost 0.1 percent.

Wall Street edged higher on Thursday, with the major indexes .DJI .SPX .IXIC up between 0.1 and 0.2 percent, as stocks basked in comments by Federal Reserve Chair Janet Yellen that the central bank's rate hikes could be gradual, given persistently low inflation despite an improving economy.

Expectations that S&P 500 companies will report second-quarter earnings growth of 7.8 percent also supported stocks. Major banks, including JPMorgan Chase (JPM.N), Citigroup (C.N) and Wells Fargo, will report results on Friday.

"The U.S. profit reporting season looks likely to be a key market driver over the next couple of weeks," Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.

"Full valuations suggest that the market is yet again going into this reporting season anticipating results to outperform consensus analyst expectations."

In Asia, markets are also expecting strong earnings, particularly for many of the export-reliant firms benefiting from an upturn in global demand.

The dollar pulled up 0.2 percent to 113.42 yen JPY on Friday, narrowing losses for the week to 0.4 percent.

The dollar index .DXY, which tracks the greenback against a basket of trade-weighted peers, was steady at 95.715, on track for a 0.3 percent weekly decline.

The dollar was supported by data showing the number of Americans filing for unemployment benefits fell last week for the first time in a month and producer prices unexpectedly rose in June.

Investors are awaiting a host of U.S. economic indicators, including core inflation, retail sales and industrial production for June later in the session for more insight into how the Fed might proceed with monetary policy tightening this year.

"After their June rate hike, the Fed is seen watching inflation trends carefully before tightening policy again. So market interest towards inflation data is very high and the dollar is likely to move widely in either direction," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

For now, markets appear to be shrugging off the revelation by U.S. President Donald Trump's son this week that he'd met with a Russian lawyer during the 2016 presidential campaign after being told she might have damaging information about Democratic candidate Hillary Clinton.

But political concerns in the U.S. may once again vex investors, as a revised Senate plan to dismantle Obamacare drew criticism from both Republican and Democratic senators.

Senate Majority Leader Mitch McConnell, who was forced two weeks ago to scrap a planned vote on an earlier version, has planned for a vote on the retooled bill next week.

The euro EUR was up 0.1 percent at $1.1407 on Friday, after inching down 0.1 percent overnight, and is set to end the week flat.

The European Central Bank is likely to signal in September that its bond-buying scheme will be gradually wound down next year and ECB chief Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal said on Thursday.

The Canadian dollar CAD remained near its strongest in over a year after the Bank of Canada this week raised interest rates for the first time since 2010, with further tightening expected this year.

The loonie was marginally weaker on Friday at C$1.2731 to the dollar but is up 1.1 percent this week.

In commodities, oil was mostly steady as high fuel inventories despite supply cuts by the Organization of Petroleum Exporting Countries tussled with data that showed a jump in China's oil imports in the first half of 2017.

U.S. crude was unchanged at $46.08 a barrel, after rising 1.3 percent on Thursday. It is poised for a 4.2 percent gain this week.

Global benchmark Brent LCOc1 was also little changed at $48.43 following Thursday's 1.4 percent jump, and is headed for a 3.7 percent gain this week.

Gold was steady at $1,217.47 an ounce, heading for a 0.4 percent gain for the week.

Reference: Nichola Saminather

New York Fed's head of financial markets Potter speaks on global forex code

NEW YORK (Reuters) - Participants in the foreign exchange market should all adopt the global code of conduct for currency trading in a bid to achieve the highest transparency and ethical standards in a market hit by scandals, the Federal Reserve's top markets official said on Wednesday.

This was a reference to guidelines from the industry that stemmed from charges of rigging and misuse of confidential customer order information that saw seven of the world's top banks fined about $10 billion at the end of a global inquiry in 2015.

"I encourage you to adopt the Code as a benchmark for your firm's activities in the wholesale FX market and use the Statement of Commitment to demonstrate that adoption to your fellow participants," New York Federal Reserve's markets chief Simon Potter said in a prepared speech at a conference sponsored by FX Week.

The 55 principles in the code cover six primary areas - ethics; governance; execution; information sharing; risk management and compliance and confirmation and settlement.

Central banks and the foreign exchange industry can take steps to support the adoption of the code among all types of participants that include dealers, high frequency trading firms, FX trading platforms and algorithmic service providers, Potter said.

The New York Fed is currently assessing its currency market activities relative to the code and evaluating what steps, if any, it must take to be able to make its own statement of commitment, Potter said.

Reporting by Richard Leong;

Thursday, 13 July 2017

Fed's Yellen says rate and portfolio plans on track, cautions on inflation

WASHINGTON (Reuters) - The U.S. economy is healthy enough for the Fed to raise rates and begin winding down its massive bond portfolio, though low inflation and a low neutral rate may leave the central bank with diminished leeway, Fed Chair Janet Yellen said on Wednesday.

In what may be one of her last appearances before Congress, Yellen depicted an economy that, while growing slowly, continued to add jobs, benefited from steady household consumption and a recent jump in business investment, and was now being supported by stronger economic conditions abroad.

The Fed "continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time," Yellen said in her prepared testimony. Reductions in the Fed's portfolio of more than $4 trillion in securities are likely to begin "this year," she said.

But she also noted that given current estimates, the federal funds rate "would not have to rise all that much further" to reach a neutral level that neither encourages nor discourages economic activity. The Fed still feels the economy needs loose, or accommodative, monetary policy, so a lower neutral rate means the Fed may feel compelled to slow the pace of rate hikes down the road.

But for now, Yellen told members of the House Committee on Financial Services, the economy remains strong enough for the Fed to continue to gradually tighten policy. In response to questions from lawmakers, she said she expects the gradual run down of the balance sheet will "play out smoothly" in markets.

The reduction in the balance sheet, which will begin slowly as the Fed reinvests only a portion of the holdings that mature each month, will mark the final exit from crisis-related policies.

Economy on Even Keel

Yellen's past appearances before the House panel have sometimes involved sharp exchanges with lawmakers who think the Fed's influence over the economy has grown too strong. Such lawmakers want policymakers to be guided more closely by a mathematical rule for setting interest rates.

This session was a more sedate meeting, with Committee Chair Jeb Hensarling, an advocate "rules-based" monetary policy, complimenting the Fed for including comparisons of its monetary policy with some of the more common formulas.

The Federal Reserve Board Chairwoman Janet Yellen testifies before a House Financial Services Committee hearing covering monetary policy on Capitol Hill in Washington, U.S., July 12, 2017.
Aaron P. Bernstein
Her appearance, coming as the Trump administration mulls whether to replace her when her term ends in February, broke little new ground in terms of policy or regulatory changes.

"We have a relatively light regulatory agenda at this point," Yellen said. She confirmed the Fed was reviewing some of the requirements imposed on bank boards of directors following the financial crisis, with any eye towards possibly easing some of them.

She also repeated the Fed's strong opposition to proposals that policymakers worry could give elected officials influence over what are supposed to be independent Fed interest rate decisions.

According to her testimony the economy is on an even keel, near or beyond full employment.

U.S. stocks rose, while yields on Treasury bonds fell and the dollar was little changed against a basket of currencies.

In a separate release, the Fed's latest beige book of reports from regional Fed banks showed "slight to moderate" economic growth across the country.

A recent dip in inflation has been of concern among Fed officials who want to see surer progress toward the central bank's 2 percent inflation goal. Yellen, however, ascribed it to "a few unusual reductions in certain categories of prices" that would eventually drop out of the calculation.

The current situation "raises the stakes" for upcoming inflation data, said Jim Vogel, interest rate strategist for FTN Financial in Memphis, Tennessee. "People are going to be very anxious if that was just a statistical glitch...or if it is going to continue."

Otherwise, Yellen said, the economy appeared to be in a virtuous loop of hiring, spending and investment that "should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases."

Reporting by Howard Schneider;