South African rand held steady after interest rate hike

Reuters: The South African rand held steady against the dollar early on Friday, trading at its strongest level in more than a month after the central bank delivered a higher than forecast rate hike the previous day.

South African Rand held steady

At 0647 GMT, the rand traded at 17.8200 against the dollar, not far from its previous close of 17.8125. The South African Reserve Bank raised its main lending rate by 50 basis points to 7.75% on Thursday, twice the 25 basis point increase that most economists had predicted. The bank has now raised rates for the ninth time in a row, adding a total of 425 bps to the repo rate since it began tightening policy in November 2021.

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The decision helped the rand breach the 18 rand per dollar barrier for the first time in more than six weeks. “In relative terms, the ZAR still has a long way to go. However, with the SARB now hawkish, there may be enough to help the ZAR unwind more of its undervaluation,” said ETM Analytics in a research note. The government’s benchmark 2030 bond was stronger in early deals, with the yield down 2.5 basis points to 9.875%.

British Pound

Reuters: Sterling eased versus the dollar on Friday as a murky economic outlook overshadowed data showing Britain’s economy avoided a recession in the final months of 2022. Despite meagre trading on Friday, the pound remains on track for its biggest monthly gain in four months of 3%, and a 2.4% quarterly gain. “The pound is set to be the best-performing currency of the first quarter of 2023, having gained 2.5% against the dollar”, wrote Francesco Pesole, FX strategist at ING in a note. “Along with the improvement in the economic outlook, sterling is definitely drawing benefits from the market’s conviction that the Bank of England will need to continue raising rates.”

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Data on Friday showed gross domestic product increased by 0.1% between October and December after a preliminary estimate of no growth. Household finances were boosted by state energy bill subsidies but investment by businesses fell. British house prices also slid in March at the fastest annual rate since the financial crisis, mortgage lender Nationwide said on Friday. High inflation and worries about weak growth are still weighing on the pound, which was down 0.10% at $1.23740 by 1124 GMT. The pound meanwhile ticked up slightly against the euro to 87.97 pence.

Data last week showed British inflation unexpectedly rose to 10.4% – over five times the Bank of England’s target rate of 2% and the highest among the Group of Seven rich nations. Even so, the pound is set to end the month 3% higher against the dollar, erasing February’s 2.4% drop. The BoE raised interest rates last week for the 11th time in a row. Markets are pricing in a 60% chance of a further 25 bp hike from the central bank in May, and a 40% chance of no change.

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US Dollar

Reuters: The U.S. dollar was broadly higher as fears over inflation resurfaced after a surprise announcement by major oil producers to cut production further, with traders wagering the Federal Reserve may need to increase interest rates at its next meeting. The announcement from the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, comes after data on Friday showed U.S. consumer spending rose moderately in February after surging the prior month, with inflation showing some signs of cooling even as it remained elevated. “While receding broader contagion risks, positive developments in China and expectations that the Fed is nearing the end of the tightening cycle should keep sentiments broadly supported, the oil price gain due to the surprise production cut is a fresh risk to inflation,” said Christopher Wong, a currency strategist at OCBC in Singapore. “Fresh inflation risks do imply the inflation fight is not over.”

The euro was down 0.44% to $1.0791, after touching a one-week low of $1.0788, while the Japanese yen weakened 0.46% to 133.41 per dollar. Sterling was $1.2277, down 0.45% on the day. The dollar rose 0.32% against the Swiss franc. The dollar index , which measures the U.S. currency against six peers, was 0.078% higher at 103.01, breaking past 103 for the first time in a week. The OPEC+ cuts caused oil price increases of more than 6% on Monday. The cuts were announced even before a virtual meeting of the OPEC+ ministerial panel, which includes representatives from Saudi Arabia and Russia, that was expected to stick to cuts of 2 million barrels per day already in place until the end of 2023. Instead, the oil producers on Sunday announced further output cuts of around 1.16 million bpd.

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The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 4.6 basis points at 4.108%. The yield on 10-year Treasury notes was up 2.9 basis points to 3.519%. Markets are now pricing in the probability of the Fed hiking rates by a quarter point in May to 61%, from 48% on Friday. But, by the end of the year, expectations are priced in for cuts of 40 basis points. Friday’s report from the U.S. Commerce Department showed that personal consumption expenditures price index rose 5.0% in February from a year earlier, down from the 5.3% increase in January. A measure of core inflation – seen as a better gauge of future price increases – came in a shade lower than expected at 4.6%. Additional data also showed U.S. consumer sentiment fell for the first time in four months in February on concerns of an impending recession, although the impact of the banking crisis was muted.

Citi strategists said concerns over financial stability are fading and any drag from tighter credit is likely to be both lagged and limited. “Still, the recent experience likely will keep the Fed more cautious in raising rates and markets more cautious in pricing hawkish policy,” Citi strategists said in a note, adding they expect 25 basis point hikes at the next three Fed meetings. The risk-sensitive Australian dollar fell 0.30% to $0.667 ahead of a high-stakes policy meeting from the Reserve Bank of Australia this week, with markets betting the central bank will stand pat on interest rates after 10 interest rate hikes. The kiwi slid 0.62% to $0.622, its biggest one-day percentage drop since March 24. In cryptocurrencies, bitcoin last fell 2.43% to $27,703.00. Ethereum , last fell 2.27% to $1,776.40.

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Global Markets

Reuters: The U.S. dollar was broadly higher as fears over inflation resurfaced after a surprise announcement by major oil producers to cut production further, with traders wagering the Federal Reserve may need to increase interest rates at its next meeting. The announcement from the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, comes after data on Friday showed U.S. consumer spending rose moderately in February after surging the prior month, with inflation showing some signs of cooling even as it remained elevated. “While receding broader contagion risks, positive developments in China and expectations that the Fed is nearing the end of the tightening cycle should keep sentiments broadly supported, the oil price gain due to the surprise production cut is a fresh risk to inflation,” said Christopher Wong, a currency strategist at OCBC in Singapore. “Fresh inflation risks do imply the inflation fight is not over.”

The euro was down 0.44% to $1.0791, after touching a one-week low of $1.0788, while the Japanese yen weakened 0.46% to 133.41 per dollar. Sterling was $1.2277, down 0.45% on the day. The dollar rose 0.32% against the Swiss franc. The dollar index , which measures the U.S. currency against six peers, was 0.078% higher at 103.01, breaking past 103 for the first time in a week. The OPEC+ cuts caused oil price increases of more than 6% on Monday. The cuts were announced even before a virtual meeting of the OPEC+ ministerial panel, which includes representatives from Saudi Arabia and Russia, that was expected to stick to cuts of 2 million barrels per day already in place until the end of 2023. Instead, the oil producers on Sunday announced further output cuts of around 1.16 million bpd.

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The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 4.6 basis points at 4.108%. The yield on 10-year Treasury notes was up 2.9 basis points to 3.519%. Markets are now pricing in the probability of the Fed hiking rates by a quarter point in May to 61%, from 48% on Friday. But, by the end of the year, expectations are priced in for cuts of 40 basis points. Friday’s report from the U.S. Commerce Department showed that personal consumption expenditures price index rose 5.0% in February from a year earlier, down from the 5.3% increase in January. A measure of core inflation – seen as a better gauge of future price increases – came in a shade lower than expected at 4.6%. Additional data also showed U.S. consumer sentiment fell for the first time in four months in February on concerns of an impending recession, although the impact of the banking crisis was muted.

Citi strategists said concerns over financial stability are fading and any drag from tighter credit is likely to be both lagged and limited. “Still, the recent experience likely will keep the Fed more cautious in raising rates and markets more cautious in pricing hawkish policy,” Citi strategists said in a note, adding they expect 25 basis point hikes at the next three Fed meetings. The risk-sensitive Australian dollar fell 0.30% to $0.667 ahead of a high-stakes policy meeting from the Reserve Bank of Australia this week, with markets betting the central bank will stand pat on interest rates after 10 interest rate hikes. The kiwi slid 0.62% to $0.622, its biggest one-day percentage drop since March 24. In cryptocurrencies, bitcoin last fell 2.43% to $27,703.00. Ethereum , last fell 2.27% to $1,776.40.

Published by the Mercury Team on 3 April 2023

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