South African rand firmed: Euro near three-week low

Reuters: The South African rand firmed on Wednesday after subdued U.S. labour data boosted bets that the Federal Reserve was done hiking interest rates and might start easing its monetary policy early next year.

South African Rand firmed

At 1500 GMT, the rand traded at 18.8425 against the dollar, around 0.7% stronger than its previous close. The dollar was little changed against a basket of global currencies. Jobs figures out of the U.S. were below market estimates on Tuesday, “raising the prospect of a Fed rate cut in March next year,” said Andre Cilliers, currency strategist at TreasuryONE.

Like other risk-sensitive currencies, the rand often takes cues from global drivers like U.S. monetary policy in the absence of local data points. The rand breached 19.00 on Tuesday after South Africa’s third-quarter gross domestic product data showed a slightly bigger than expected contraction. “The local currency will remain susceptible to any stronger moves in the Dollar and will likely trade on the back foot in the short term,” Cilliers added.

Investor focus will turn towards monthly reserves data and third-quarter current account figures due to be published by the South African Reserve Bank on Thursday. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed over 0.2% higher. South Africa’s benchmark 2030 government bond was stronger, the yield down 3 basis points at 9.980%.

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U.S. Dollar

Reuters: The euro languished near a three week low on Thursday as traders intensified bets that the European Central Bank will start cutting rates from March next year, while the dollar was steady ahead of a crucial payrolls data later this week. The euro was up 0.05% at $1.0767, but remained close to lows of $1.07595 it touched on Wednesday. The single currency is down 1% this week and on course for the steepest weekly decline since May. Traders are betting that there is around an 85% chance that the ECB cuts interest rates at the March meeting, with almost 150 basis points worth of easing priced by the end of next year.

The question of a rate cut could emerge in 2024, ECB member and Bank of France head Francois Villeroy de Galhau told a French paper in an interview published on Wednesday. Villeroy told La Depeche du Midi that “disinflation is happening more quickly than we thought.” The ECB will set interest rates on Thursday next week and is all but certain to leave them at the current record high of 4%. The Federal Reserve and Bank of England are also likely to hold rates steady next Wednesday and Thursday respectively.

The dollar has found its footing this month after a 3% drop in November as traders ramp up rate cut bets for other central banks. The dollar index, which measures the U.S. currency against six rivals, was little changed at 104.12, having risen 0.17% overnight. The index is up 0.9% this week, on course for its strongest weekly performance since July. Data on Wednesday showed U.S. private payrolls increased less than expected in November, in yet another sign that the labour market is gradually cooling.

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Investor focus will be on Friday’s non-farm payrolls data for a clearer picture of the labour market. “The various labour market statistics suggest the U.S. labour market is slowly loosening,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “In our view, a sharp weakening of the labour market is needed for financial markets to price in a U.S. recession that we have long expected.” A recent string of softening economic data along with commentary from U.S. Federal Reserve officials have stoked expectations that the central bank is at the end of its rate-hike cycle and will begin to cut rates as soon as March.

Markets are pricing in a 60% chance of a rate cut in March, according to CME FedWatch tool, compared to 50% a week earlier. They are anticipating 125 basis points of cuts from the Fed next year. Analysts though have cautioned that the markets have been too aggressive in pricing in rate cuts next year. “The market is too aggressively priced for Fed rate cuts heading into 2024 and so we expect a correction in this pricing to deliver a stronger USD,” said David Forrester, currency strategist at Credit Agricole CIB.

Meanwhile, the Bank of Canada on Wednesday held its key overnight rate at 5% and, in contrast to its peers, left the door open to another hike, saying it was still concerned about inflation while acknowledging an economic slowdown and a general easing of prices. The Canadian dollar tacked on 0.01% versus the greenback to 1.36 per dollar. Elsewhere, the Japanese yen strengthened 0.16% to 147.07 per dollar. The offshore Chinese yuan eased 0.02% to $7.1717 per dollar. The Australian dollar added 0.03% to $0.655. In cryptocurrencies, bitcoin was 0.19% higher at $43,910.11.

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British Pound

FXStreet: The GBP/USD pair extends its downside above the mid-1.2500s during the early Asian trading hours on Thursday. The downtick of the pair is backed by the firmer US Dollar broadly. In the absence of economic data released from the UK docket later this week, the GBP/USD pair remains at the mercy of USD price dynamics. At press time, the major pair is trading at 1.2560, gaining 0.03% for the day. Even though US Federal Reserve Chair Jerome Powell said last week that central banks will prepare to tighten policy further if it becomes appropriate to do so, the markets believe that the tightening cycle is now over. According to a Reuters poll, analysts anticipate the Fed will hold interest rates until at least July, later than earlier thought.

About the data, Automatic Data Processing Inc. revealed on Wednesday that ADP private payrolls grew 103K in November from 106K in October, below the market consensus of 130K. On the GBP’s front, Bank of England Governor Andrew Bailey said on Wednesday that interest rates in the UK will need to stay at current levels for some time and the central bank is aware of financial stability risks that may develop from that. Additionally, Bailey further stated that the overall risk environment was challenging due to China’s economic difficulties, the potential broader conflict in the Middle East, and elevated levels of public debt.

This, in turn, might weigh on the British Pound and act as a headwind for the GBP/USD pair. Moving on, traders will monitor the weekly US Jobless Claims, due later on Thursday. The highlight of the week will be the US employment data on Friday, including Nonfarm Payrolls and Unemployment Rate. The November Nonfarm Payrolls is expected to add 185K jobs while the Unemployment Rate is estimated to remain steady at 3.9%.

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Global Markets

Reuters: Asian shares slipped with Wall Street on Thursday, while a sharp fall in oil prices to a five-month low promised to further reduce inflationary pressures and helped boost the global bond market. There was also a soft reading on the U.S. labour market overnight. Analysts note the ADP private payrolls report is historically not a very reliable predictor of the official non-farm payroll report due on Friday, making the weekly jobless claims later in the day more important. MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.5%, having been down 1.6% so far this month after a 7.3% rally in November. Japan’s Nikkei fell 1.3%, led by declines in energy and tech stocks.

China’s bluechips eased 0.4% to inch closer to a five-year trough that it hit the previous session, after the rating agency Moody’s cut the Asian’s giant’s credit outlook. Hong Kong’s Hang Seng index fell 0.7% to hover near a 13-month low. Investors are awaiting Chinese trade figures later in the day to get a gauge of the strength of the world’s second largest economy. Overnight, Wall Street was dragged lower by energy stocks as oil prices slid. The Dow Jones slipped 0.2%, the S&P 500 lost 0.4%, and the Nasdaq Composite fell 0.6%.

Oil prices steadied after falling nearly 4% overnight to their lowest settlements since June. Worries about global fuel demand drove prices lower, despite pledges from OPEC+ producers that they would keep a tight lid on supply. Brent crude futures edged up 0.4% to $74.60 a barrel while U.S. West Texas Intermediate futures rose 0.5% to $69.73 a barrel. “That’s probably the oil market giving you a bit of a heads up for what they think demand is going to be like over the next few months,” said Amy Xie Patrick, head of income strategies at Pendal Group.

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Combined with the recent price actions in the equity and bond markets, Xie Patrick said the markets were starting to worry whether the global economy could be heading to a hard landing next year. “Even though bond yields have continued to fall, equity markets are no longer rallying, credit spreads are no longer tightening. The markets are starting to wonder whether this is a good kind of bond yield rally or is the bond market telling you something a little bit more sinister.”

A risk appetite index by State Street Global Advisors showed global investors became less pessimistic in November, but they were not in an unbridled rush into risk, with the index edging up to 0 from -0.55 the previous month. Asian bonds rallied along with long-term Treasuries. Australian 10-year government bond yield hit a 2-1/2 month low of 4.225% on Thursday. The yield on the benchmark U.S. 10-year Treasury note was little changed at 4.1306%, after a 11 basis point drop overnight to a three month low of 4.1040%.

The U.S. dollar hovered near a two-week high at 104.12 against its major peers heading into the NFP release on Friday. Markets have priced in so much easing that they are clearly vulnerable to an upside payroll surprise. Economists expect the economy added 180,000 new jobs in November, picking up from 150,000 the previous month. Softening economic data and recent comments from Federal Reserve officials, including Chair Jerome Powell, have heightened expectations that the U.S. rates have peaked and a total of more than 125 basis points in cuts could commerce as early as in March. Gold prices was 0.2% higher at $2,028.81 per ounce.

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Published by the Mercury Team on 7 December 2023

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