South African rand extended gains against weaker dollar

Reuters: The South African rand extended gains on Friday as the U.S. dollar fell, leaving the rand slightly stronger than it was at the start of a bumpy week.

South African Rand extended gains

At 1532 GMT, the rand traded at 19.0925 to the dollar, about 0.5% stronger than its previous close. The dollar last traded around 0.1% weaker against a basket of global currencies. The rand had weakened to 19.3 to the dollar earlier this week as South Africa’s state utility Eskom reinstated the country’s worst-ever level of power cuts, resulting in up to 12 hours of outages a day for many households and businesses.

Power cuts have battered South Africa’s economy this year. Current account data on Thursday showed the country’s deficit widened to 2.3% of gross domestic product in the second quarter. The rand has lost more than 12% against the greenback since January. “Falling U.S. Treasury yields have helped the ZAR recover some ground against the dollar through the second half of the week,” said Danny Greeff of ETM Analytics, adding that a strong rand recovery is only likely to happen if the dollar weakens further.

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“The local unit is sorely lacking anything in the way of resilience due to South Africa’s weak risk profile, which is mainly a function of chronic fiscal maladministration,” he added. On the Johannesburg Stock Exchange, the blue-chip Top-40 index and the broader all-share index ended the day about 0.65% higher. South Africa’s benchmark 2030 government bond was slightly stronger, with the yield down 1 basis point at 10.375%.

U.S. Dollar

Reuters: The yen jumped on Monday as comments from Bank of Japan Governor Kazuo Ueda stoked hopes that Japan could soon herald a new era away from negative rates, while the dollar slid ahead of this week’s key U.S. inflation reading. The Japanese currency strengthened nearly 1% to touch a session high of 146.37 per dollar in Asia trade, boosted by weekend comments from Ueda that the central bank could end its negative interest rate policy when achievement of its 2% inflation target is in sight. Ueda told the Yomiuri newspaper in an interview that the BOJ could have enough data by year-end to determine whether it can end negative rates.

The yen has come under immense pressure against the dollar as a result of growing interest rate differentials with the United States, since the Federal Reserve began its aggressive rate-hike cycle last year while the BOJ remains a dovish outlier. “It seems that Ueda’s comments were intended to stop the yen’s slide against the dollar,” said Takehiko Masuzawa, trading head at Phillip Securities Japan. “His comments are working almost the same as government intervention.”

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Since the yen weakened past the key 145 per dollar threshold last month, traders have been on alert for any signs of intervention from Japan to shore up the currency. That level had, a year ago, prompted the first yen-buying intervention by the authorities since 1998. Elsewhere, the greenback fell broadly, distancing itself from its three-month highs struck against the euro and the British pound last week.

The euro was last 0.21% higher at $1.0722, after having ended Friday with an eight-week losing streak. Sterling gained 0.3% to $1.2503. The dollar index, which capped last week with eight straight weeks of gain, its longest run since 2014, slipped 0.12% to 104.72. U.S. inflation data for the month of August is due on Wednesday, with traders on the lookout for whether the world’s largest economy is indeed on track for a “soft landing”, and whether the Fed has further to go in raising rates.

Christopher Wong, a currency strategist at OCBC, attributed the dollar’s slide to traders “lightening up” on their long dollar positions ahead of the data. The greenback, along with U.S. Treasury yields, had surged last week after a run of resilient economic data added to bets that further rate hikes from the Fed may be on the horizon. “The overall global economy is not booming, but neither is it on the verge of recession, and the U.S. appears to be doing the best among the major economies,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

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In Asia, the onshore yuan edged away from its 16-year low of 7.3510 per dollar hit on Friday to stand at 7.3188 per dollar, while the offshore yuan similarly strengthened more than 0.4% and last bought 7.3313 per dollar. China’s consumer prices returned to positive territory in August while factory-gate price declines slowed, data over the weekend showed, pointing to easing deflationary pressures amid signs of stabilisation in the economy.

The consumer price index rose 0.1% in August from a year earlier, slower than the median estimate for a 0.2% increase in a Reuters poll, while the producer price index fell 3.0% from a year earlier, in line with expectations. “Historically, we do not see China’s inflation print negative numbers for very long, although I thought we might at least get a few more deflationary figures than the single one served,” said Matt Simpson, senior market analyst at City Index. Against the weaker U.S. dollar, the Aussie and the New Zealand dollar were among the biggest beneficiaries, each rising more than 0.5%. The Australian dollar was last 0.6% higher at $0.64165, while the kiwi gained 0.52% to $0.5914.

British Pound

Reuters: The pound hovered just above a three-month low on Friday, and was set for a 0.9% weekly fall, after hiring data added to signs of a slowdown in Britain’s jobs market. Sterling was last up just 0.06% at $1.2483, after falling to $1.2445 on Thursday, the lowest since June 8. The euro was also little changed against the pound at 85.73 pence, having traded around that level for the past four months. Signs of a slowdown in Britain’s jobs market, alongside a sharp rally in the dollar, has caused the pound to slide roughly 5% against the U.S. unit since the middle of July.

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An industry survey on Friday showed that British employers reduced the number of workers they hired through recruitment agencies last month at the fastest pace in more than three years. The slowing of the jobs market has caused traders to dial down their bets on how high the Bank of England will raise interest rates. “Sterling’s recent decline is primarily a response to a dovish repricing in near-term BoE expectations, but this leaves the pound now looking undervalued in our view,” said Nicholas Rees, FX market analyst at Monex Europe.

Rees pointed to comments from Bank of England Governor Andrew Bailey, who said on Wednesday that the BoE is “much nearer now to the top of the cycle” in interest rates. “Bailey’s dovish performance in front of Parliament has gotten markets increasingly buying into the idea that September will be the final hike from the BoE,” Rees said. The BoE next sets interest rates on Sep. 21. According to pricing in derivatives markets, traders are betting that there’s a 73% chance the Bank raises rates by 25 bps and a 27% chance it holds them at the current 5.25% level.

Traders currently see rates peaking around 5.6% in early 2024, down from as high as 6.5% in July. Meanwhile, the dollar index was also little changed on Friday but was on track for its eighth consecutive weekly increase, helping put the pound on track for a 0.85% weekly loss. HSBC’s FX analysts said in a report on Thursday that they believe both the pound and the euro will struggle against the dollar in the coming months. “Unless and until the global outlook starts to improve again, then it is unlikely that a powerful surge in risk appetite can offset the challenging domestic forces that are becoming increasingly dominant for the EUR and GBP,” they wrote.

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Global Markets

Reuters: Asia stock markets weakened on Monday as investors in China sold off shares in property developers, remaining unconvinced by authorities’ efforts to revive activity in the mainland real estate market. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3%, after U.S. stocks ended the previous session with mild gains. Australian shares reversed earlier losses to be up 0.12% and Japan’s Nikkei stock index slid 0.19%. In Hong Kong, the Hang Seng Index was down 1.4%, as investors retreated from China’s troubled property sector. The Hang Seng Property Index, a gauge of Hong Kong’s top developers, shed almost 4% while the mainland property index was off 3.24%.

“We need the property market to stabilize first in order for any meaningful kind of economic rebound to happen in China,” said David Chao, Invesco’s Asia Pacific market strategist. “We are not calling for a property rebound but we want to see some stability. “We are seeing investment down in the mid to high single digit level year on year, there is still softness in those tier 2 and 3 cities which is why we have seen a slew of measures in those areas. Those should put a floor under the property market some time soon.”

In recent weeks China’s authorities – including the housing ministry, central bank and financial regulator – have rolled out a series of measures, such as easing borrowing rules, to support the debt-riddled property sector, and there are some expectation for more steps to revive demand in major ciities like Beijing, Shanghai and Shenzhen. Hong Kong stocks were also dampened as e-commerce giant Alibaba Group dropped 3.1% on the surprise departure of outgoing CEO Daniel Zhang from its cloud unit. China’s bluechip CSI300 Index was up 0.37%.

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In the United States, the Consumer Price Index for August, due out on Wednesday, is expected to rise 0.6% month-on-month for August, which would take the year on year rate to 3.6%, according to a Wells Fargo research note. Investors are pricing in a 93% probability that the Fed will keep rates at current levels after its next meeting ends on Sept. 20 but only a 53.5% change for another pause at the November meeting, according to CME group’s FedWatch Tool.

The yield on benchmark 10-year Treasury notes rose to 4.2939% compared with its U.S. close of 4.256% on Friday. The two-year yield , which rises with traders’ expectations of higher Fed fund rates, touched 5.0033% compared with a U.S. close of 4.984%. In China, there was an easing of deflationary pressures with consumer price index rising 0.1% in August from a year earlier. That was slower than the median estimate for a 0.2% increase in a Reuters poll but much stronger than a 0.3% decline in July.

China also had its smallest drop in factory prices in five months. The producer price index fell 3.0% from a year earlier, in line with expectations, after a drop of 4.4% in July. Global energy markets are also keeping a close watch on Chevron Corp’s negotiations with its workers after strikes began at key liquefied natural gas facilities in Australia that supply 5% of the world’s output. European gas prices have been volatile since August when news of the potential labour unrest first broke.

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Gas prices spiked as much as 14% after Friday’s news that strikes would start following five days of talks which resulted in no deal. The dollar on Monday dropped 0.85% against the yen to 146.56. It remains some way off its high this year of 147.87 on reached earlier this month. The European single currency was up 0.2% on the day at $1.0709, having lost 1.09% in a month, while the dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was down 0.114% at 104.73.

China’s central bank yanked the yuan off a 16-year low against the dollar on Monday by setting a daily midpoint guidance rate with the strongest bias on record, signaling increasing discomfort with the currency’s recent weakness. In the spot market, the onshore yuan was changing hands at 7.3245 per dollar at 0210 GMT, after hitting 7.3510 on Friday, which as 6.1% down from the start of the year and a level last seen during the global financial crisis. U.S. crude dipped 0.57% to $87.01 a barrel. Brent crude fell to 0.21% to $90.46 per barrel. Spot gold was trading slightly higher at $1,918.3663 per ounce.

Published by the Mercury Team on 11 September 2023

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