Thursday, 13 July 2023

US Dollar pinned near 15 month low

The US dollar hovered at 15-month lows on Friday and was set for its worst week since November last year as markets wagered the Federal Reserve was close to the end of its rate hike cycle as inflation eases.

The dollar index, which measures the US currency against six major rivals, fell 0.114% to 99.649, having touched a fresh 15-month low of 99.574 earlier in the session. The index is down 2.5% for the week, its worst weekly run in eight months.

Investors have been betting on a turn in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.

US producer prices barely rose in June and the annual increase in producer inflation was the smallest in nearly three years, data showed on Thursday, a day after data showed consumer prices rose modestly last month.

"Markets are generally pretty pleasant with the lower inflation data, because lower inflation together with the still resilient labour market supports the narrative of a soft landing in the US economy," said Carol Kong, currency strategist at Commonwealth Bank of Australia in Sydney.

"But we still maintain our view that the US will enter a recession later this year because of the impact of past and potentially future interest rate hikes."

Markets are still pricing in a 92% chance of a 25 basis point hike from the Fed later this month, CME FedWatch tool showed, but no more for the rest of the year.

Data on Thursday also showed that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, indicating that the labour market remains tight even as job growth is slowing.

Fed officials remain cautious, with Federal Reserve Governor Christopher Waller saying he's not ready to call an all clear on US inflation and favours more rate rises this year.

Shane Oliver, head of investment strategy at AMP Capital, said the Fed is still likely to hike another 25 bps this month on concerns that services inflation remain too high and worries that stopping too early when the labour market is still tight could see inflation reignite.

"But that may be it. US inflation also led inflation in other countries on the way up so its decline augurs well for other countries".

 

 

Can NATO allies save United States from eventual defeat in Ukraine?

The NATO summit this week delivered yet another blow to Russian President Vladimir Putin, with allies standing as united as ever against his war in Ukraine while announcing efforts to expand the alliance and boost defense spending.

The most punishing setback for Putin came on the eve of the summit, when Turkish President Recep Tayyip Erdoğan hashed out a deal to admit Sweden into NATO after more than a year of resistance.

Erdoğan’s reversal not only puts the gears in place to expand the borders of the western security alliance — it also signals the Turkish leader is moving closer to the west and away from Putin.

“He’s no longer interested in being dependent on Putin economically and strategically,” said Asli Aydıntaşbaş, a visiting fellow at Brookings Institution with the Turkey Project. “I think Russians are upset. I think the Kremlin is very upset.”

It also helped repair Turkey’s strained relations with its NATO allies and gave President Biden a major win heading into the high-profile summit in Vilnius, Lithuania. 

At the end of the summit, Biden declared that NATO was more united than ever in its history.

“We will not waver,” Biden affirmed in the Wednesday speech. “Our commitment to Ukraine will not weaken. We will stand for liberty and freedom today, tomorrow and for as long as it takes.”

Erdoğan’s Sweden approval also came just days after he freed Ukrainian fighters from the Azov regiment, a move that deeply angered the Kremlin because the prisoners of war were supposed to remain in Turkey until the end of the war.

Aydıntaşbaş said the prisoner release is an even bigger blow than the Sweden deal, the latter of which was likely anticipated. She assessed the Turkish leader has now sensed Putin has become weak — especially after the Wagner revolt — and is drifting closer to Biden.

“I wouldn’t call this a reset, but it lays the groundwork for a reset between the West and Turkey and that would be a big deal,” she added. “Because at the end of the day, Turkey is NATO’s second largest army and its drift away from the West has been a big issue.”

Aydıntaşbaş, however, acknowledged Erdoğan often makes deals for transactional benefits, and since he does not view the Ukraine war as a binary issue, he is likely to continue to play both sides.

Erdoğan only backed Sweden after he extracted concessions from the West, including enhanced counterterrorism operations, more arms sales and Swedish support for Turkey’s European Union membership hopes.

Erdoğan may also have won a deal to purchase long-awaited F-16 jets from Washington to modernize his air force, as the US announced the paused sale was moving forward a day after the Sweden agreement.

At the summit, Western allies also agreed to boost defense spending levels, a commitment that, if adhered to, would strengthen the alliance and its support for Ukraine. Members are now pledging to spend a minimum of 2 percent of gross domestic product on military resources and security.

NATO has for years tried to get the commitment to stick, to no avail. But Secretary-General Jens Stoltenberg said 11 allies have now reached or exceeded the target, while overall spending by Canada and Europe increased by 8.3% this past year. 

“This is the biggest increase in decades,” Stoltenberg said. “And we expect this number will rise substantially next year.”

Putin secured a minor victory in the dashing of Ukraine’s NATO aspirations, with GOP presidential contender and former United Nations ambassador Nikki Haley saying that Biden made Putin’s day by refusing to commit to Kyiv’s future NATO membership. 

But the US and Ukraine sought to minimize the damage at the end of the summit.

NATO decided against fast-tracking Kyiv into the alliance or setting a clear timeline for membership, a move Ukraine says will only embolden Russia and allow Moscow to use inclusion into the alliance as a bargaining chip in peace talks.

But the alliance still took steps toward admitting Ukraine, removing a procedural hurdle, establishing a NATO-Ukraine council and affirming that Kyiv is closer than ever to membership.

Ukrainian President Volodymyr Zelensky, who had expressed disappointment in the membership process just a day earlier, said he held a powerful meeting with Biden Wednesday.

“The meeting was at least twice as long as planned, and it was as meaningful as it needed to be,” Zelensky tweeted. “If the protocol had not stopped the meeting, we would have talked even longer.”

NATO allies this week also announced big steps toward supporting Ukraine in the long run, putting a damper on Moscow’s hopes of weakening Western support for the war.

A coalition of 11 NATO countries set a date for F-16 training in August for Ukrainian pilots; France confirmed the shipment of much-needed long-range missiles for Ukraine; and the Group of Seven (G7) economic and political bloc announced a long-term security commitment for Kyiv.

Russia has tried to downplay the news coming out of the summit. Moscow’s Foreign Intelligence Service chief told state-run media outlet TASS that the summit did not bring “any surprise to Russia.”

But Liana Fix, a fellow for Europe at the Council on Foreign Relations, said Russia’s attempts to weaken the narrative have largely failed.

“From a Russian propaganda perspective, it makes sense to downplay this as much as possible,” she said. “But the facts just speak against Russia, especially the long-term commitment of G7 members to deter Russia and to erode the optimism in the Kremlin [hoping] everyone in Europe gets tired.”

The Vilnius summit showed allies are standing by Ukraine, even as there are concerns about a lagging counteroffensive launched in early June and the prospect of a longer war, Fix said.

“At the beginning of this year, the messaging was all about Ukraine [and] what it means for this one counteroffensive this year,” she continued. “And I think that was recognized as a bit of a trap.”

This is “sort of an attempt to make clear that the commitment is not only until the end of this year, but the commitment will also extend to the next year.”

 

Wednesday, 12 July 2023

United Nations to ease sanction on Russia

Reportedly, UN Secretary-General Antonio Guterres has proposed to Russian President Vladimir Putin that he extends a deal allowing the safe Black Sea export of grain from Ukraine in return for connecting a subsidiary of Russia's agricultural bank to the SWIFT international payment system.

Russia has threatened to ditch the grain deal, which expires on Monday, because several demands to dispatch its own grain and fertilizer abroad have not been met. The last two ships traveling under the Black Sea agreement are currently loading cargoes at the Ukrainian port of Odesa ahead of the deadline.

A key demand by Moscow is the reconnection of the Russian agricultural bank Rosselkhozbank to the SWIFT international payment network. It was cut off by the European Union in June 2022 over Russia's invasion of Ukraine.

Earlier, an EU spokesperson said in May the EU was not considering reinstating Russian banks. However, the EU is now considering connecting to SWIFT a subsidiary of Rosselkhozbank to allow specifically for grain and fertilizer transactions.

Guterres has proposed to Putin that Russia allow the Black Sea grain deal to continue for several months, giving the EU time to connect a Rosselkhozbank subsidiary to SWIFT.

Guterres sent a letter to Putin on Tuesday proposing a way forward to further facilitate Russian food and fertilizer exports and ensure the continued Black Sea shipments of Ukrainian grain, a UN spokesman said on Wednesday.

"The objective is to remove hurdles affecting financial transactions through the Russian Agricultural Bank, a major concern expressed by the Russian Federation, and simultaneously allow for the continued flow of Ukrainian grain through the Black Sea," UN spokesman Stephane Dujarric told reporters.

He gave no further details on the proposal, but added that Guterres was engaged with all relevant parties on the issue and was willing to further discuss his proposal with Russia.

The United Nations and Turkey brokered the Black Sea Grain Initiative with Russia and Ukraine in July 2022 to help alleviate a global food crisis worsened by Moscow's invasion and blockade of Ukrainian ports.

To convince Russia to agree to the Black Sea deal, a three-year memorandum of understanding was struck at the same time under which UN officials agreed to help Russia get its food and fertilizer exports to foreign markets.

While Russian exports of food and fertilizer are not subject to Western sanctions imposed after the invasion of Ukraine, Moscow says restrictions on payments, logistics and insurance have amounted to a barrier to shipments.

As a workaround to the lack of access to SWIFT, UN officials have gotten US bank JPMorgan Chase & Co to start processing some Russian grain export payments with reassurances from the US government.

The United Nations is also working with the African Export-Import Bank (Afreximbank) to create a platform to help process transactions for Russian exports of grain and fertilizer to Africa, the top UN trade official told Reuters last month.

Tuesday, 11 July 2023

Pakistan: Excessive reliance on IMF may prove disastrous

Reading today’s’ headlines about approval of IMF package for Pakistan leaves a strange feeling. I am inclined to draw an inference, “Pakistan is not on the priority list of lender of last resort ‑ International Monetary Fund (IMF)”. Please keep in mind that a paltry amount of US$3 billion is to be disbursed to Pakistan over the next nine months.

To begin with, these nine months are very critical for Pakistan because: assemblies will complete their term, interim government has to be put in place and general elections have to be held. Allow me to say that during these months Pakistanis should not expected any improvement in the economic conditions, on the contrary, the economy could go from bad to worse.

Many analysts say, “The incumbent government has wasted time in debating ‘non-issues’ and refrained from taking some important decisions to put the economy on track”. The GDP growth rate is likely to remain below one percent, exporters are fast losing their competitiveness, hike in interest rate leaves no amount to undertake developmental work and efforts to contain import of raw materials are proving counterproductive.

It is feared that the interim government may defer elections on some flimsy grounds which could further deteriorate the economic landscape. Seeking new foreign exchange deposits from friendly countries and rolling over existing debts is plunging Pakistan deeper into debt trap.

Yemen: Transfer of oil from decaying ship to start next week

Transfer of crude oil from the dilapidated tanker ‘Safer’ stranded off the coast of Yemen, is expected to start early next week, a senior United Nations humanitarian official told the Security Council on Monday.

Carrying over 1.1 million barrels of oil, the supertanker FSO Safer was abandoned off Yemen’s Red Sea port of Hodeidah after the civil war broke out in the country in 2015. Since then, the vessel has deteriorated significantly in absence of any servicing or maintenance, prompting fears of a major environmental disaster.

According to David Gressly, UN resident and humanitarian coordinator for Yemen, the vessel Nautica is preparing to sail from Djibouti. It will moor alongside the Safer and once the transfer starts, it will take about two weeks.

“The completion of the ship-to-ship transfer of the oil by the start of August will be a moment when the whole world can heave a sigh of relief,” Gressly said, adding that the “worst-case humanitarian, environmental and economic catastrophe from a massive oil spill will have been prevented.”

After the oil has been off-loaded, the next critical step will include delivery and installment of a catenary anchor leg mooring (CALM) buoy, which is secured to the seabed, and to which the replacement vessel will safely be installed. The CALM buoy needs to be in place by September.

Backed by generous funding from Member States, the private sector, and the general public, which contributed US$300,000 through a crowdfunding campaign, UN raised about US$118 million of the US$148 million estimated budget for the undertaking.

The broad coalition working to prevent the catastrophe also includes environmental groups, including Greenpeace and, in Yemen, Holm Akhdar; as well as several UN entities.

At a separate meeting of the 15-member Security Council on Monday, UN Special Envoy for Yemen, Hans Grundberg, called on the warring parties to reach a “serious breakthrough” in the ongoing discussions to finally end the conflict between an international coalition backing the recognized Government, and Houthi rebels.

He said that despite a period of relative calm, the situation in crisis-ridden Yemen remains fragile and challenging, and that the country “cannot afford a seasonal peace”.

The Special Envoy underscored the need for the parties to the conflict to make further, bold steps toward a peace that is sustainable and just.

“This means an end to the conflict that promises accountable national and local governance, economic and environmental justice, and guarantees of equal citizenship for all Yemenis, regardless of gender, faith, background or race,” he said.

In his briefing, Grundberg outlined a course of action including an immediate halt to military provocations and a sustainable nationwide ceasefire, economic de-escalation and addressing longer term economic priorities.

He added the parties need to agree a clear path to restarting an intra-Yemeni political process, under UN auspices.

Assistant-Secretary-General for Humanitarian Affairs and Deputy Emergency Relief Coordinator, Joyce Msuya, also briefed and told Security Council members that humanitarian needs in Yemen will remain high for the foreseeable future.

In 2023, relief agencies aim to reach 17.3 million people, out of a staggering 21.6 million people in need of assistance, she said, adding that halfway through the year, the Humanitarian Response Plan for Yemen is funded at just 29 percent.

“As the political process progresses, we must remain vigilant and active on the humanitarian front. With better funding and more access, we can expand our reach and improve the protection of civilians — but we also need to see support for measures to improve Yemen’s economy,” she concluded.

US dollar dominance diminishing

The US dollar grip as the dominant global currency is loosening, said top economist of credit rating agency S&P Global on Tuesday.

Aggressive US sanctions such as last year's freezing of hundreds of billions of US dollar's worth of Russia's reserves has seen a flurry of countries start to do some trade in currencies other than dollar as well as repatriate gold reserves.

The dollar "doesn't have quite the pull it used to," Paul Gruenwald, S&P's chief economist, said at a conference hosted by the ratings firm in London.

"There's a fragmentation around the edges".

Gruenwald pointed to a number of examples where countries were now circumventing the dollar, "We've got other things happening outside of the dollar world".

He cited the rise in trade done in China's yuan and the cheap financing offered by China-headquartered development banks such as the Asia Infrastructure Investment Bank and the New Development Bank, formerly known as the BRICs bank.

"The US dollar will continue to be a leading world currency, but it will no longer be the dominant world currency," Gruenwald said.

US dollar sank to a two-month low against its major peers on Wednesday in the lead-up to a key US inflation reading, while sterling scaled a 15-month top on expectations the Bank of England (BoE) has further to go in raising rates.

US inflation data is due later on Wednesday, with expectations core consumer prices rose 5% on an annual basis in June. The figures should also provide further clarity on the Federal Reserve's progress in its fight against inflation.

Ahead of the release, the US dollar fell to a two-month low against a basket of currencies, extending its losses from the start of the week after Fed officials said the central bank was nearing the end of its current monetary policy tightening cycle.

 

Tanker war resumes in Persian Gulf

Iran accuses US Navy of defending fuel smuggling

An Iranian Revolutionary Guards Commander accused the US Navy on Monday of defending fuel smuggling in the Gulf by trying to interfere when Iran intercepted a ship last week.

"On July 06, Revolutionary Guards' Navy personnel were inspecting a ship with the name NADA 2 that was involved in smuggling Iranian oil and gas in the Persian Gulf, which the Americans sought to prevent through a series of unprofessional and risky actions," IRGC Commander Ramazan Zirrahi said in comments reported by Iran's Tasnim news agency.

On July 07, Iran's Fars news agency reported that the Revolutionary Guards had seized a vessel carrying 900 tons of smuggled fuel with 12 crew members, following a court order.

"The Americans flew several aircraft, including two A-10 fighters, and tried until the last moment to prevent the seizure of the vessel, but it was eventually brought to Bushehr port for legal procedures," he added.

US 5th Fleet spokesperson Commander Tim Hawkins had said last week that the US Navy had monitored the interception of the ship in international waters but had decided not to make any further response.

The incident was one of several involving Iranian forces and Gulf shipping last week.

In another incident, the US Navy said Iranian naval personnel had fired multiple, long bursts at the Bahamas-flagged Richmond Voyager managed by US oil major Chevron, following Tehran's claims that the ship was involved in a collision which injured 5 crew members from an Iranian ship.

Chevron denied the tanker was involved in a collision and said it had not been notified of legal proceedings or court orders by Iran regarding the ship.