South African rand firmed; Dollar weakens on bank sector fears

Reuters: The South African rand firmed in early trade on Thursday, as the U.S. dollar fell against most major currencies following comments from the Federal Reserve that suggested it may stop hiking rates.

South African rand firmed

At 0625 GMT, the rand traded at 18.2500 against the dollar, about 0.2% stronger than its previous close. The dollar was down about 0.15% against six rivals. The Fed on Wednesday raised its benchmark interest rate by 25 basis points, as expected, but also watered down the language in its policy statement about the need for further rate hikes.

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Local investors will be looking to South Africa’s S&P Global purchasing managers’ index survey due on Thursday to gauge the health of the economy. South Africa’s benchmark 2030 government bond was stronger in early deals, with the yield down 5.5 basis points at 10.070%.

US Dollar

Reuters: The yen was close to its first weekly gain in nearly a month on Friday, driven by safe-haven demand as bank sector turmoil in the U.S. unfolds, while the dollar fell as traders priced in more aggressive rate cuts from the Federal Reserve. The euro edged away from its recent one-year peak and last stood at $1.1043, after the European Central Bank on Thursday slowed the pace of its interest rate increases with a 25-basis-point rise, though the single currency was still higher on the day against a sliding greenback. Although ECB President Christine Lagarde signalled more tightening to come, markets pared back their expectations on how much further rates would rise. “Lagarde was hawkish in her press conference, but I think financial markets didn’t really buy her view on further rate rises in coming months,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

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In the broader currency market, the yen was last more than 0.2% higher at 133.96 per dollar, and was headed for a weekly gain of over 1.5%, snapping three straight weeks of losses. “The Japanese yen has slowly gained back its appeal of safe haven status, and has definitely been supported by concerns about U.S. regional banks and the associated safe-haven demand,” Kong said. A deepening crisis across U.S. regional banks has kept investors on tenterhooks, with pressure growing on U.S. regulators to take more steps to shore up the sector. Shares of PacWest Bancorp plunged on Thursday, dragging other regional lenders down after the Los Angeles-based bank’s plan to explore strategic options heightened investor fears. Canada’s Toronto-Dominion Bank Group the same day also called off its $13.4 billion takeover of First Horizon Corp, in another sign of stress within the sector.

Traders have since priced in more aggressive rate cuts from the Fed, with Fed funds futures implying a small chance that cuts could come as soon as June and through to the end of the year. That left the greenback broadly lower on Friday, with the dollar index slipping 0.18% to 101.16. The Aussie and the kiwi were among the largest beneficiaries of the sliding dollar, each rising more than 0.5% and touching multi-week highs. Sterling gained 0.27% to $1.26085. “For the Fed’s June decision, inflation data and employment indicators, along with bank lending standards will be key to watch. The debt ceiling negotiations are another important risk,” said Sonia Meskin, head of U.S. macro at BNY Mellon. “We believe the Fed is unlikely to contemplate cutting rates before 2024.” April’s nonfarm payrolls report is due later on Friday, the next major data point that will offer further clues on the Fed’s fight against inflation.

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Data released earlier this week showed that the U.S. services sector maintained a steady pace of growth in April, suggesting that inflation remains sticky, while U.S. private employers boosted hiring last month. The Australian dollar was last up 0.62% at $0.6735, after touching a two-week peak earlier in the session. The kiwi scaled a one-month high of $0.6317. The Reserve Bank of Australia, in a quarterly statement on monetary policy on Friday, warned that risks to inflation were on the upside given low productivity growth, rising energy prices and a surge in rents as population growth outpaces all expectations.

British Pound

Reuters: The British pound was steady against the dollar on Thursday having hit an 11-month high overnight after the Federal Reserve raised rates but signalled an end to its tightening cycle is in sight. The U.S. central bank raised its benchmark rate by a quarter point but dropped from its policy statement language that said it “anticipates” further rate increases would be needed, sending the dollar lower against other major currencies, including the pound. “It the pound has capitalised on the weaker dollar in the wake of the dovish Fed decision,” said George Vessey, foreign exchange and macro strategist at Convera. By 1000 GMT, sterling was little changed against the dollar at $1.2567, having hit its highest level since June last year at $1.2593 overnight.

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The pound was edging higher against the euro ahead of an expected rate increase from the European Central Bank on Thursday, with the size of the move still up for debate. Markets are fully pricing in a 25 basis point move, with around a 20% chance of a larger 50 basis point hike. Of 69 economists surveyed by Reuters, 57 expect a quarter-point move, with the other 12 forecasting a 50 basis point hike. The euro was last down 0.1% versus the pound at 87.94 pence. Meanwhile, a survey showed Britain’s services sector had its fastest growth in a year in April, boosted by new orders, while prices charged by businesses picked up pace, adding pressure on the Bank of England to keep raising interest rates.

The BoE is set to announce its policy decision in a week and is widely expected to raise rates by a quarter point, with markets pricing in further tightening in upcoming meetings. “Our latest views are that the BoE may not push back against these expectations next week – which would see sterling hang onto recent gains,” said Chris Turner, global head of markets and regional head of research for UK and CEE at ING. Eyes were also on local elections in Britain, viewed as one of the last big opportunities to gauge public support before a national election expected next year, and a chance to assess if the main opposition Labour Party can convert its run of double-digit poll leads into election victories.

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Global Markets

Reuters: Asian stocks rose, the dollar eased and gold hovered near record highs on Friday, as investors worried that a rout in shares of U.S. regional lenders earlier this week could herald more trouble for the banking sector. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.44% higher and was on course to snap its two-week losing streak as investors bet that the Federal Reserve may soon have to cut interest rates. As investors flocked to safe haven assets, spot gold moved closer to its record high and the yen appeared set for its first weekly gain in nearly a month. Shares of U.S. regional banks sank this week after the collapse of First Republic Bank, bringing back worries of a widening banking sector crisis that began with the collapse of Silicon Valley Bank in March. “There is increasing nervousness about the banking problems in the U.S. and I fear that the central banks are going too far,” said Shane Oliver, chief economist at AMP Capital in Sydney.

“There seems to be a view among central banks that they’ve got it under control, whereas the means that they’ve used to try and control it, are actually creating more problems.” Wall Street ended lower on Thursday after Los Angeles-based PacWest Bancorp’s move to explore strategic options deepened fears about the health of U.S. lenders as pressure grows on regulators to take more steps to shore up the country’s banking sector. Shares of another regional lender Western Alliance pared losses after plummeting by nearly 60% on a Financial Times report that it was exploring strategic options. Western Alliance denied the report. “There is a risk that we enter a self-fulfilling cycle of negative sentiment leading to lower stock prices, higher funding costs and deposit flight,” said James Rutherford, head of European equities at Federated Hermes.

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The turmoil in the banking sector comes as the Federal Reserve raised interest rates by 25 basis points on Wednesday but hinted that its marathon hiking cycle may be ending. Markets are pricing for the Fed to stand pat at its next meeting in June before embarking on rate cuts from July, according to CME FedWatch tool. “There is plenty of data between now and the June 14 Fed meeting, with what happens in the banking sector being more key at the moment,” Saxo Markets strategists said. U.S. nonfarm payroll data for April will be released later in the global day. European stock markets looked set for a higher open, with Eurostoxx 50 futures up 0.42%, German DAX futures up 0.39% and FTSE futures up 0.33%. On Thursday, the European Central Bank raised interest rates by 25 basis points to 3.25% and signalled that more tightening would be needed to tame inflation. Markets though pared back their expectations on how much further rates would rise.

Nick Rees, FX market analyst at Monex Europe, said it was clear that the ECB is now in the home stretch when it comes to monetary tightening, despite ECB President Christine Lagarde’s attempt to steer markets away from this narrative. China shares fell 0.71%, while Hong Kong’s Hang Seng index was up 0.6%. China’s service activity grew for a fourth straight month in April, a private-sector survey showed on Friday, as businesses continued to benefit from the country’s reopening, although expansion slowed slightly. E-mini futures for the S&P 500 rose 0.35% after Apple Inc’s results beat expectations, helped by better-than-expected iPhone sales and notable inroads in India and other newer markets. In the currency market, the Japanese yen strengthened 0.20% to 134.04 per dollar, on course for its first weekly gain in nearly a month.

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Sterling was last trading at $1.26095, up 0.27% on the day, having touched an 11-month high of $1.26150. The euro firmed 0.27% to $1.10435. Against a basket of currencies, the dollar eased 0.170% to 101.17. Meanwhile, spot gold eased 0.1% to $2,049.68 an ounce, hovering close to its all-time high of $2,072.49. U.S. crude rose 0.77% to $69.09 per barrel and Brent was at $73.07, up 0.79% on the day. Still, oil prices were set for a third straight week of losses after markets witnessed dramatic drops on fears of a weakening U.S. economy and slowing Chinese demand.

Published by the Mercury Team on 5 May 2023

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