South African Rand jumps as dollar slips on U.S. producer prices

Reuters: The South African rand jumped on Thursday as the dollar fell after U.S. data showed producer prices dropped last month, fuelling expectations that the Federal Reserve is near the end of its rate hiking cycle.

South Africa’s Rand jumped again

At 1521 GMT, the rand traded at 18.0875 against the dollar, about 1.89% stronger than its previous close. U.S. producer prices unexpectedly fell in March, data showed, as the cost of gasoline declined, and there were signs that underlying producer inflation was subsiding. The dollar index was last down 0.5% at 100.97 against a basket of global currencies. “A weaker dollar has helped lift commodity prices and emerging market currencies today. The rand is a beneficiary of higher commodities, specifically key export metals,” Shaun Murison, senior market analyst at IG, told Reuters.

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Locally, mining data released earlier in the day by Statistics South Africa did little to affect investor sentiment, despite a 5% fall in total mining output year-on-year for February. “Today’s soft mining production and sales figures for February 2023 seem to have done little to deter these gains,” Murison said. Overall on the Johannesburg Stock Exchange, the blue-chip Top-40 index closed up 1.03%, while the broader all-share index ended the day 0.93% higher. The government’s benchmark 2030 bond was slightly stronger, with the yield down 2 basis points at 9.885%.

British Pound

Reuters: Sterling rose to its highest since last June on Thursday, as the dollar hovered at a two-month low after a slowdown in U.S. inflation, while data showed the UK economy essentially stagnated in February. Britain’s economy showed no growth in February as strikes by public workers hit output, but a bounce in January was stronger than first thought, meaning a recession is a bit less likely to be brewing in early 2023. “It’s all a bit of a broad dollar story today”, said Simon Harvey, head of FX analysis at Monex Europe, describing the UK data as “fairly lagged” in terms of any kind of influence on monetary policy. The pound was 0.2% higher against the dollar at $1.2507 by 1040 GMT. The pound, meanwhile, was 0.1% lower against the euro at 88.10 pence.

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The upward revision to January’s growth to 0.4% from 0.3% means Britain is likely to avoid the first-quarter contraction that the Bank of England predicted last month, but data due next week is seen as more important for monetary policy. “Data next week on inflation and retail sales, but especially jobs data for February, will be crucial because the PMI for the month suggested maybe demand has picked back up again,” said Harvey. The BoE has raised interest rates 11 times in a row in its battle to bring down inflation, which rose to 10.4% in February. Markets are pricing in a 64% chance of a further 25 basis point hike in May, and a lesser chance of no change. “We don’t think they’re going to hike again,” said Harvey, “but there is a non-negligible risk that they would if the data comes in quite strong.”

A murky economic backdrop also remains in focus. A BoE survey on Thursday showed British lenders expect to rein in the supply of mortgage loans in the coming quarter, but increase the supply of consumer credit and corporate loans. Meanwhile, a survey showed Britain’s housing market continued to feel the pinch of higher borrowing costs in March, but property surveyors expect some improvement over the year ahead as they think interest rates are now near their peak.

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US Dollar

Reuters: The U.S. dollar tumbled to a one-year low against a basket of currencies on Friday while the euro hit a one-year peak, as traders ramped up expectations of an imminent end to the U.S. Federal Reserve’s rate-hike cycle on signs of cooling inflation. Data from the U.S. Labor Department on Thursday showed the producer price index fell by the most in nearly three years last month, coming a day after inflation data pointed to moderation in consumer prices. The greenback took another leg down on Friday and the U.S dollar index , which measures the currency against six major peers, slid to a roughly one-year low of 100.78. It was last 0.15% lower at 100.82, and was headed for a weekly decline of more than 1%, its steepest drop since January. Meanwhile, the euro rose to a fresh one-year top of $1.1075, pushing past its previous high from Thursday. The common currency was last 0.2% higher at $1.1070, and on track for a weekly gain of more than 1.5%. “The easiest way to express a dollar negative view has been with the euro,” said Ray Attrill, head of FX strategy at National Australia Bank.

“The significant downside surprise in U.S. PPI has made people a bit more convinced of the view that the Fed will soon be done, and strengthened conviction that inflation will allow the Fed to be cutting rates before the end of the year.” Similarly, the British pound hit a 10-month high of $1.2545, and was last 0.14% higher at $1.25405. Money markets are pricing in a 69% chance the Fed will raise interest rates by 25 basis points next month, though a series of cuts are also being priced in from July through to the end of the year, with rates seen just above 4.3% in December. Adding to signs that global inflationary pressure is waning was an unexpected surge in Chinese exports, which in March shot up 14.8% from the same month a year earlier, stunning economists who predicted a 7.0% fall in a Reuters poll. The upbeat Chinese data, alongside a robust March employment report in Australia, kept the Australian dollar supported at around $0.6783 on Friday, having surged 1.3% in the previous session on the back of the data releases.

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The Australian and New Zealand dollars are often used as liquid proxies for China’s yuan. “It was almost like a perfect positive storm for the Aussie,” said Attrill. “Starting with the employment numbers and the China trade numbers which looked exceptionally good. “You layer on top of that, the dollar weakness from the data last night and positive risk sentiment, and it was a raft of good news for the Aussie.” The New Zealand dollar similarly gained 0.19% to $0.6309, after jumping 1.3% on Thursday. Elsewhere in Asia, Japan’s yen rose marginally to 132.47 per dollar, while the offshore yuan gained more than 0.5% to 6.8327 per dollar.

Global Markets

Reuters: Asian shares firmed on Friday as Singapore became the latest country to pause its policy tightening and markets became more confident the likely next hike in U.S. rates would be the last this cycle. The dovish signals helped keep non-yielding gold near one-year highs, while the euro led the currency pack as the European Central Bank stays stubbornly hawkish. The Monetary Authority of Singapore surprised many by leaving policy unchanged, saying the tightening already underway would ensure inflation slowed sharply later this year. The MAS joined central banks in Canada, Australia and India in putting hikes on hold, while the U.S. Federal Reserve was seen nearer pausing after a soft producer price report. Futures still imply a 68% chance the Fed will raise rates in May, but then almost zero chance of a further increase and maybe 50 basis points of cuts by year end. Figures on U.S. retail sales are due later in the session and some analysts are warning the risk is for a downside surprise, which would support the dovish turn.

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The prospect of a peak for rates helped offset worries about recession and MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.6%. Japan’s Nikkei added 1.1% and Singapore stocks 0.4%. Chinese blue chips firmed 0.4%, with the economic outlook brightened by a surprisingly upbeat trade performance. “The stronger-than-expected March China export gain suggests that the economic recovery is more broadly-based than our expectations, and we have revised up our 1Q GDP forecast,” wrote analysts at JPMorgan in a note. They now see seasonally adjusted annual growth of 10.2%, from 9.0% previously. EUROSTOXX 50 futures added 0.3% and FTSE futures 0.2%. S&P 500 futures and Nasdaq futures were steady after sharp gains overnight. Investors are now bracing for earnings from Citigroup Inc, Wells Fargo and JPMorgan Chase & Co which could test the bullish mood given recent stress in the sector. “We will be looking at bank earnings calls to follow discussions around deposits, lending standards, and any adjustments to bank funding that might be planned, including more debt sales,” said analysts at NatWest Markets.

At the European Central Banks, the hawks are the ones making the most noise. With EU industrial output beating expectations and inflation proving sticky, markets are pricing in at least 50 basis points more tightening and no cuts this year. The divergence saw the spread between U.S. 10-year yields and German bunds shrink to its smallest in two years near 100 basis points. A break under 100bp would see the spread at its narrowest since early 2014, when the euro was up around $1.3600. On Friday, the single currency was firm at $1.1067 , having hit a one-year top of $1.1075. The euro was also near highs seen back in November above 146.00 yen , and jumped to a 10-month peak on the Singapore dollar after the MAS decision. The dollar was relatively steady on the yen at 132.51 yen , supported by the Bank of Japan’s easy policy stance. Bank of Japan Governor Kazuo Ueda said on Thursday he told his G20 counterparts the central bank will likely keep monetary policy ultra-loose.

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All the talk of future U.S. rate cuts has given non-yielding gold a boost, with the yellow metal up at $2,042 an ounce after striking a one-year peak of $2,048.71 overnight, not far from its all-time top of $2,069.89. Oil prices firmed as planned cuts to output offset warnings from OPEC on summer oil demand in a monthly report. Brent edged up 30 cents to $86.39 a barrel, while U.S. crude rose 37 cents to $82.53 per barrel.

Published by the Mercury Team on 14 April 2023

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