Forex Signals - Dollar Climbs; Fed Minutes Offer Downbeat Outlook

Forex Signals - Dollar Climbs; Fed Minutes Offer Downbeat Outlook - The U.S. dollar posted gains in early European trade Thursday, as investors digested the latest downbeat comments from the Federal Reserve, while Asian data offered no real recovery clues.

At 2:45 AM ET (0645 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 99.403, up 0.3%, EUR/USD dropped 0.1% to 1.0962, while USD/JPY rose 0.2% to 107.76.

Earlier Thursday, a trade report from South Korea, a bellwether for global commerce, showed exports may be set to drop more than 20% in May for a second month. Meanwhile, Japan’s overseas shipments also plunged by more than a fifth in April and a purchasing managers index showed manufacturing activity weakening further in May.

Adding to this, Federal Reserve members said the impact of the coronavirus would "weigh heavily on growth in the near term, and posed considerable downside risks to the economic outlook over the medium term," according to the minutes of their April meeting out Wednesday.

An air of positivity had returned to the market as countries started to reopen their economies, but the wary nature of these comments coupled with the disappointing data served to hit risk appetite, sending buyers back to the safe haven U.S. dollar.

Attention will now turn to the release of the key weekly U.S. jobless claims figures, at 8:30 AM ET (12:30 GMT), with economists looking for a dip from last week, but a slight one as companies are still forced to shed jobs.

Claims for first-time unemployment benefits are expected to come in at 2.4 million, compared with nearly 3 million the week before.

Elsewhere, sterling has continued to weaken, weighed by apparent difficulties in Brexit trade negotiations with the EU as well as the prospect of negative interest rates given the likely depth of the economic slowdown ahead.

U.K. Chancellor Rishi Sunak warned earlier this week that the country faced a “severe recession, the likes of which we haven't seen.”

And that was before the country’s inflation rate fell to 0.8% in April, its lowest since August 2016.

”[The data] keeps the debate about negative rates alive and kicking,” Kit Juckes, macro strategist at Societe Generale, told CNBC.

At 02:45 AM ET, GBP/USD traded 0.4% lower at 1.2193.

Elsewhere, central banks in Turkey and South Africa are both scheduled to hold policy meetings later Thursday and both are expected to cut rates again despite the heavy losses their currencies have recently endured.

Analyst polls predict South Africa will cut its 4.25% main rate by another 50 basis points, while Turkey’s central bank will likely cut another 50-100 basis points off its 8.75% repo rate.

At 02:45 AM ET, USD/TRY traded flat at 6.7888 and USD/ZAR up 0.6% at 18.0291.

(Bloomberg) -- The tidal wave of dollar liquidity, which eased a global credit crunch, has left Japanese and South Korean bonds reeling in its wake.

Investors funded with the U.S. currency are seeing returns on hedged holdings of these bonds shrink.

Funds that offer dollars in the swap market to borrow yen or South Korea’s won and park the proceeds in short-dated onshore government debt earn a yield of 0.38% and 1.10%, respectively, according to Bloomberg’s analysis. The rates were 2.87% and 3.11% at the start of 2019.

The shrinking returns illustrate how a concerted global push to pump dollars into the world economy has left some investors worse off. As yields decreased, global funds sold more than 8 trillion yen ($74 billion) of Japanese debt in the last two months.

“Hedge premiums have become less compelling for foreigners to buy Japanese government bonds,” said Akio Kato, general manager of strategic research and investment at Mitsubishi UFJ (NYSE:MUFG) Kokusai Asset Management. Without those premiums, global interest in negative-yielding JGBs will fade, he said.

The stress in dollar funding has eased after the Federal Reserve extended liquidity through swap lines to its global peers, including the Bank of Japan and the Bank of Korea. Persistent speculation that U.S. interest rates may turn negative has also undermined the dollar’s premiums in the FX swap market.

While the recent decline in hedged yields has eroded the appeal of South Korean bonds, the notes are still reeling in global funds, thanks to their relative advantage over Treasuries. Investors bought 5.2 trillion won ($4.2 billion) of the debt due in less than a year in April, the most since 2008.

“We recommend looking beyond the usual candidates for yield enhancement to other markets with developed market-like characteristics,” Tom Nash and Himanshu Malik, strategists at HSBC Holdings Plc (LON:HSBA), wrote in a research note last week. “Korea stands out in this respect with relatively elevated bond yields in comparison” with other low-yielding peers, they wrote.

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