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Dollar inches up in thin holiday trading

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The dollar firmed slightly in early Asian trade on Wednesday as a recent rally in shares showed signs of petering out, but holiday-thinned trading meant markets were showing little real direction.

The euro lost 0.14% overnight to $1.1307 and the pound slipped from a five-week high, helping to take the dollar index, which measures the greenback against major peers, to 96.165 from as low as 95.958 on Friday.

But with many traders having taken time off for Christmas or the end of the year, analysts said it was hard to read too much into the moves.

“Things are mostly noise right now, though we are probably seeing a soft risk-on/risk-off dynamic going on with stocks down slightly, and the dollar has caught a bid on the inverse of that,” said Kyle Rodda, an analyst at IG Markets.

He said longer term, however, he was bullish on the greenback due to approaching rate hikes by the Federal Reserve and the apparent reduced chance of future lockdowns in the United States.

The Fed is widely expected to begin hiking rates before several other major central banks such as the European Central Bank, and this has helped the dollar index to have its best year in 2021 since 2015.

The S&P 500 and the Nasdaq Composite both closed slightly lower on Tuesday, albeit after the S&P 500 posted gains for four straight days and hit a record intraday high earlier in the session. [.N]

Markets have been largely trading based on changing assessments of the impact of the Omicron variant of COVID-19, with the recent rally in risk assets like equities based on a view the new strain would not derail the global economic recovery too much.

U.S. health authorities on Monday shortened the recommended isolation time for Americans with asymptomatic cases of COVID-19 to five days from the previous guidance of 10.

The yen, which had been weakening alongside those advances in shares, stemmed its losses Wednesday. It was last at 114.78 per dollar compared to Tuesday’s month-low of 114.94.

The dollar was also supported by a rise in two-year Treasury yields which hit 0.758% on Tuesday, a near two-year high, before slipping marginally to 0.7461%. [US/]

The Australian dollar was steady at $0.7232.

Moves were more stark in cryptocurrencies, which often see sharp swings in low liquidity periods such as weekends and holidays.

Bitcoin lost around 6% to as low as $47,300, giving up all of the steady gains it had made this week.

Ether, the world’s second-largest cryptocurrency which underpins the ethererum network, also lost around 6% late on Tuesday to as low as $3,760, also a week low.

 

(Reporting by Alun John; editing by Richard Pullin)

Economy

China's economy grows 8.1% in 2021, slows in second half – Yahoo Canada Finance

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BEIJING (AP) — Chinese leaders are under pressure to boost slumping economic growth while they try to contain coronavirus outbreaks ahead of next month’s Winter Olympics in Beijing.

The world’s second-largest economy grew by 8.1% last year, but activity fell abruptly in the second half as the ruling Communist Party forced China’s vast real estate industry to cut surging debt, official data showed Monday.

Growth sank to 4% over a year earlier in the final three months of the year, fueling expectations Beijing may need to cut interest rates or stimulate the economy with more spending on public works construction.

That slump is likely to worsen, leading to “more aggressive measures to boost growth,” Ting Lu and Jing Wang of Nomura said in a report.

On Monday, the Chinese central bank cut its interest rate for medium-term lending to commercial banks to the lowest level since early 2020, at the start of the coronavirus pandemic.

Asian stock markets ended the day mixed following the dual announcements. China’s benchmark Shanghai Composite Index gained 0.6% while the Hang Seng in Hong Kong lost 0.7%. The Nikkei 2225 in Tokyo rose 0.7%.

Lingering Chinese economic weakness has potential global repercussions, depressing demand for steel, consumer goods and other imports.

China rebounded quickly from the pandemic, but activity weakened last year as Beijing tightened controls on borrowing by real estate developers, triggering a slump in construction that supports millions of jobs. That made consumers nervous about spending and investors anxious about possible defaults by developers.

Consumer spending has suffered after authorities responded to virus outbreaks by blocking most access to cities including Tianjin, a port and manufacturing center near Beijing, and imposed travel controls in other areas.

Their “zero-COVID strategy” aims to keep the virus out of China by finding and isolating every infected person. That has helped to keep case numbers low but is depressing consumer activity and causing congestion in some ports.

The ruling party has stepped up enforcement ahead of the Feb. 4 start of the Winter Games, a prestige project. Athletes, reporters and officials at the Games are required to stay in sealed areas and avoid contact with outsiders.

Growth in consumer spending, the biggest driver of economic growth, fell to 1.7% over a year earlier in December from the previous month’s 3.9%.

“The prospect this year for consumer spending to rebound back to pre-pandemic levels has certainly dimmed,” David Chao of Invesco said in a report. “All eyes are on whether policymakers will evolve their zero-COVID pandemic policies.”

Officials have urged the public to stay where they are during the Lunar New Year holiday instead of visiting their hometowns. That will cut spending on travel, gifts and banquets during the country’s most important family holiday.

Forecasters have cut this year’s growth outlook to as low as 5% due to the debt crackdown and coronavirus.

“Downward pressure on growth will persist in 2022,” Tommy Wu of Oxford Economics said in a report.

Compared with the previous quarter, the way other major economies are measured, the Chinese economy grew 1.4% in the final three months of 2021. That was up from the previous quarter’s 0.2%.

Chinese exports, reported Friday, surged 29.9% in 2021 over the previous year despite a global shortage of semiconductors needed to make smartphones and other goods and power rationing imposed in major manufacturing areas.

Exporters benefited from reviving global demand while their foreign competitors were hampered by anti-virus controls. But economists say this year’s trade growth is likely to be weak and export volumes might shrink due to congestion at ports.

“With supply chains already stretched to capacity, last year’s boost from surging exports can’t be repeated,” Julian Evans-Pritchard of Capital Economics said in a report.

Auto sales fell for a seventh month in November, declining 9.1% from a year earlier, reflecting consumer reluctance to commit to big purchases.

Chinese leaders are trying to steer the economy to more sustainable growth based on domestic consumption instead of exports and investment and to reduce financial risk.

In mid-September, factories in some provinces were ordered to shut down to meet official targets for reducing energy use and energy intensity, or the amount used per unit of output.

One of the country’s biggest developers, Evergrande Group, is struggling to avoid defaulting on $310 billion owed to banks and bondholders. Smaller developers have collapsed or defaulted on debts after Beijing reduced the amount of borrowed money they can use.

Chinese officials have tried to reassure investors over the risks of wider problems, saying any impact on lending markets can be contained. Economists say a potential Evergrande default should have little effect on global markets.

___

National Bureau of Statistics (in Chinese): www.stats.gov.cn

Joe Mcdonald, The Associated Press

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Omicron no match for US economy: Moody's – Investment Executive

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“The backdrop of elevated inflation and a tight labour market strengthens the case for an earlier and faster normalization of monetary policy,” Moody’s said. “Indeed, notwithstanding the risks to growth posed by the Omicron surge, the Fed is well placed to move to a neutral monetary stance starting in March 2022, and we now expect three U.S. interest rate hikes this year, compared with our November expectation of none until 2023.”

Additionally, a recent shift in signals out of the Fed indicate “broad support” for both a rate hike in March and a normalization of its balance sheet soon after the rate increase cycle begins, Moody’s noted.

While Covid-19 infections have risen quickly in the U.S., creating added uncertainty, “the economy is on a solid expansionary path that the current virus surge is unlikely to derail,” the report noted.

Moody’s continues to expect that GDP will grow by 4.4% this year after rising by 5.4% in 2021.

“The surge in virus cases will no doubt dampen economic activity in pandemic-sensitive services industries in January but, as previous virus surges have shown, activity will rebound once the omicron wave begins to subside,” Moody’s said.

The report noted that latest epidemiological forecasts point to a peak in case counts by the end of the month, with hospitalizations and fatalities peaking in mid-February.

Inflation is expected to moderate this year, but Moody’s said there remains a good deal of uncertainty in inflation forecasts.

“We expect that the Fed will provide more concrete guidance at its next January meeting as to when and at what pace it will begin to raise the federal funds rate and reduce the size of its balance sheet,” it said.

The rating agency noted that it expects the Fed to take a “measured approach” to withdrawing stimulus and normalizing its balance sheet, given the elevated uncertainty in forecasts and a likely reluctance to move too quickly.

Ultimately though, the prospect of rate hikes and balance sheet normalization “will likely push both short-term rates and long-term yields upward,” Moody’s said.

“The effect of rising rates is likely to be transmitted to the real sector by curbing new lending for consumer goods, autos and homes. Small and mid-size firms, which tend to have shorter debt maturity profiles, will also be affected,” it said. “Lastly, higher interest rates will weigh on the valuations of risky assets.”

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Firms see increasing labor shortages and wage pressures – Bank of Canada survey

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Canadian firms see labor shortages intensifying and wage pressure increasing, with strong demand growth and supply chain constraints putting upward pressure on prices, a regular Bank of Canada survey said on Monday.

The central bank’s Business Outlook Survey Indicator reached its highest level on record in the fourth quarter, which was conducted before the Omicron coronavirus variant began spreading widely.

The data will play into the Bank of Canada’s calculations as it ponders when to raise rates. The bank, which has said it is paying close attention to wage inflation, is scheduled to make its next announcement on Jan 26.

Last October it said it could start raising rates as soon as April 2022, but some investors expect a hike this month. [BOCWATCH]

“The combination of strong demand and bottlenecks in supply is expected to put upward pressure on prices over the next year,” said the survey.

“In response to capacity pressures, most businesses across sectors and regions are set to increase investment and plan to raise wages to compete for workers and retain staff.”

Last month the central bank said slack in Canada’s economy has been substantially diminished.

Inflation expectations for the next two years continued to increase, with two-thirds of firms now expecting inflation to be above the central bank’s 1-3% control range over the next two years.

Most firms, in response to a special question, said they expected the currently elevated inflationary pressures to dissipate over time, with inflation returning to the 2% target over 1-3 years.

Canada’s annual inflation rate was at an 18-year high of 4.7% in November. The December data will be released on Wednesday, with analysts surveyed by Reuters expecting it to hit 4.8%.

The Canadian dollar was trading 0.4% higher at 1.2504 to the greenback, or 79.97 U.S. cents.

(Additional reporting by Fergal Smith in Toronto; Editing by Chizu Nomiyama)

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