South African rand gained; Nikkei slides as rate hikes loom

Reuters: The South African rand gained on Thursday on increasing bets that the U.S. Federal Reserve might implement interest rate cuts early next year.

South African rand gained

At 1506 GMT, the rand traded at 18.8250 against the dollar, up over 0.7%, while the dollar was last trading 0.25% weaker against a basket of global currencies. A slew of economic data has illustrated a softness in the U.S. labour market and has strengthened the market’s view of a pivot in the Fed’s policy through next year, said Bheki Mahlobo, a market analyst at ETM Analytics.

“The pricing in of rate cuts from potentially as early as March has seen U.S. Treasury yields trading lower, improving the outlook on riskier assets such as the ZAR, with the currency further supported by lower oil prices,” Mahlobo said. Global investor focus will now turn towards payrolls data on Friday, which could give hints on the future interest rate path of the world’s biggest economy. The rand often takes cues from global factors such as U.S. monetary policy in addition to local drivers.

Locally, South African Reserve Bank data earlier showed the country’s current account deficit narrowed sharply in the third quarter to 0.3% of gross domestic product from a revised 2.7% in the second quarter. Separately, South Africa’s net foreign reserves rose to $56.319 billion at the end of November from $55.510 billion in October. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed over 0.8% lower. South Africa’s benchmark 2030 government bond was marginally stronger, with the yield down 0.5 basis point to 9.975%.

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Global Markets

Reuters: Japanese markets were reeling on Friday, with the Nikkei heading for its biggest weekly drop since October, bonds battered and the yen surging toward its largest weekly gain for five months as investors rushed out of bets on Japanese rates staying low. Beyond Japan MSCI’s broadest index of Asia-Pacific shares ex Japan rose 0.5% and Treasuries sold slightly. The Nikkei was down 1.6% for a weekly drop of 3.3%. Other moves were more modest as traders wait on U.S. labour data due later in the day.

The yen leapt more than 2% on Thursday and was well supported on Friday, though kept below an overnight four-month peak of 141.6 per dollar to trade at 143.39. Bank of Japan Governor Kazuo Ueda told parliament on Thursday the central bank faces an “even more challenging” year ahead before discussing options for exiting its ultra-easy settings, which traders took as a sign of change in the offing. The BOJ is due to set policy rates on Dec. 19. “This may prove to be too soon for large steps to be unveiled, but we believe it is a matter of when, not if, the BOJ jettisons its negative interest rate regime,” said Corpay currency strategist Peter Dragicevich.

“This eventual turn and the capital flow implications underpins our forecasts looking for the ‘undervalued’ yen to strengthen over the next year. This is also one of the pillars behind our outlook for the dollar to weaken.” Japan’s bond market remained under heavy pressure, with the 10-year government bond yield up almost 15 basis points in two sessions to 0.79%, although still well below the BOJ’s soft cap of 1%. Five-year bonds , which suffered their sharpest single-day selloff in a decade on Thursday, with the yield up 10.5 bps, rose another 3.5 bps to 0.375% on Friday. Yields rise when bond prices fall.

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Data showing Japan’s economy fell faster than first estimated in the third quarter, as the household sector faced growing headwinds, complicates the central bank’s outlook. U.S. jobless claims met expectations, leaving the focus on whether Friday’s broader payrolls figures will reflect growing signs that the job market is slowing. Overnight the Nasdaq finished 1.4% higher after a 5.3% jump for Google parent Alphabet as markets cheered the launch of its newest AI model. Shares in Australian gas producer Santos were last up 6% on news it was in talks with larger rival Woodside about a merger. Woodside shares fell 1%.

In currency trade the yen’s surge has the dollar index eyeing a slim weekly loss at 103.59. The euro was lower for the week at $1.0785. The Australian dollar, weighed by a slowing economy and traders’ perception that the central bank is turning dovish, was set to snap a three-week winning streak with a 1% drop this week to $0.6607. Brent crude futures touched a five-month low overnight, before recovering slightly to $75.02 a barrel in Asia trade. Oil is set for a 5% fall this week.

Gold, having touched a record high early in the week before recoiling, was clinging on at $2,032 an ounce. Bitcoin is eying an eighth consecutive weekly gain on expectations that U.S. interest rates have peaked and anticipation that a bitcoin ETF might be approved. It last bought $43,484.

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U.S. Dolllar

Reuters: The yen extended its towering rally on Friday and marched toward its best week against the dollar in nearly five months, as traders ramped up expectations that the end of Japan’s ultra-low interest rates was closing in. The broad strength from the yen kept a lid on the dollar, which stayed on the defensive ahead of the closely-watched U.S. nonfarm payrolls report due later on Friday. Bank of Japan governor Kazuo Ueda said on Thursday the central bank had several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory, and had on the same day met with Prime Minister Fumio Kishida.

Markets took those comments as the clearest sign yet that the BOJ could soon phase out its ultra-loose monetary policy and catapulted the yen to multi-month highs against its major peers. Against the dollar, the yen was last steady at 144.30, after having surged over 2% in the previous session and striking a four-month high of 141.60. The yen had, as recently as a month ago, fallen to a one-year low of 151.92 per dollar, coming under pressure as a result of growing interest rate differentials with the United States.

That kept traders on edge over potential intervention from Japanese authorities to prop up the currency as it had done last year. The Japanese currency similarly stood near Thursday’s four-month peak on the euro, and was last at 155.67 per euro. The Aussie meanwhile last bought 95 yen, retracing some of its losses from the previous session where it fell nearly 2%. Attention now turns to the BOJ’s upcoming two-day monetary policy meeting on Dec. 18. “Obviously, the markets got very excited,” said Ray Attrill, head of FX strategy at National Australia Bank. “But I think a lot of us have felt that we were going to have some sort of more meaningful policy change this year, and we’ve been disappointed. So I’m a bit reluctant to jump on the bandwagon and say that a change is going to happen on the 19th.

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“But obviously, there’s no smoke without fire. So I guess the market is understandably taking the view that the December meeting is live now.” In the broader market, the dollar largely drifted sideways, with currency moves outside of the yen subdued ahead of Friday’s U.S. jobs data. The euro steadied at $1.0792 though was eyeing a weekly decline of more than 0.8%, while sterling last bought $1.2589 and was similarly headed for a weekly fall of nearly 1%. The U.S. dollar index slipped 0.05% to 103.63, though was on track to gain 0.4% for the week. That would snap three straight weeks of declines, as the greenback attempts to stem losses from its heavy selloff in November.

“I’m more interested in seeing what happens with the unemployment rate and what happens with average earnings than the nonfarm payrolls numbers,” said NAB’s Attrill. “Obviously, if we get a big shock on the payrolls – a big downside or upside surprise – the markets’ initial reaction will be governed by that.” Elsewhere, the Australian dollar slipped 0.05% to $0.6599. In China, the offshore yuan edged 0.1% higher to 7.1560 per dollar. Data on Thursday showed the country’s exports grew for the first time in six months in November, though imports unexpectedly shrunk.

Concerns over the country’s growth outlook continue to mount, with investor sentiment still fragile on the back of an uneven post-COVID recovery in the world’s second-largest economy. Moody’s had, earlier this week, slapped a downgrade warning on China’s credit rating, and followed up a day later with cuts to its outlook on Hong Kong, Macau and swathes of China’s state-owned firms and banks. “Moody’s downgrade of China’s rating outlook was motivated by concern over China’s rising debt levels and possible need to bailout local state-owned enterprises,” said William Xin, fixed income portfolio manager at M&G Investments, though he said the move had “failed to consider” Chinese policymakers’ emphasis on reducing debt over the years.

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British Pound

Reuters: The pound edged up against the dollar and the euro on Thursday, but sank against the yen, as investor expectations mounted that the Bank of Japan could signal an end to its ultra-easy monetary policy next week. Sterling lost 1.3% in value against the yen, its largest one-day drop against the Japanese currency in nearly five months. The pound has held firm this month, after its biggest monthly rally in a year in November. Investors are gaining confidence the major central banks will cut rates early next year. But the Bank of England is likely to be an exception.

Futures markets show investors believe the first cut from the BoE might not happen until June, compared with March for both the European Central Bank and the Federal Reserve, which has helped limit any profit-taking on November’s rally. The catalyst for the yen’s broad-based rally on Thursday was comment from Bank of Japan Governor Kazuo Ueda, who told the Japanese parliament the central bank has several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory.

“The choice of wording – ‘once’, not ‘if’ – suggests the BOJ remains committed to normalising policy, most likely around the start of the fiscal year in April,” City Index analyst David Scutt said in a note. “But with markets bringing forward the expected timing and scale of rate cuts from other major central banks, such a move would be incredibly risky, creating a scenario that could send the Japanese yen sharply higher against currencies of its major trading partners.”

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The pound was last up 0.2% against the dollar at $1.2587 and up 0.1% against the euro at 85.65 pence. Against the yen, it was down 1.45% at 182.31 yen, its lowest since late October. The BoE also meets next week. Markets expect it to leave UK rates unchanged, but they will scrutinise the post-meeting statement for evidence of how Monetary Policy Committee members voted and the central bank outlook on inflation and growth. Futures markets show traders think UK rates could fall by around 80 basis points next year to below 4.40%, in contrast to the European Central Bank, which traders expect to implement around 140 bps in cuts, and the Federal Reserve, which could cut U.S. rates by around 120 bps.

Yields on 10-year UK gilts are trading below 4% at their lowest in seven months, having fallen 75 bps in the last six weeks. German 10-year yields, the benchmark for the euro zone, have dropped 80 bps and 10-year U.S. Treasury yields have fallen 90 bps. The “higher for longer” scenario for the BoE has given sterling some support. “When it comes to euro/sterling, the drop appears to be overdone, and we expect a gradual dovish repricing in Bank of England rate expectations to favour a rebound above 86.00, although that may not happen in the very short term,” ING strategist Francesco Pesole said in a note this week.

Published by the Mercury Team on 8 December 2023

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