South African rand regained lost ground: Wall St. notches weekly loss

Reuters: The South African rand regained lost ground on Friday against the U.S. dollar while global focus remained on conflict in the Middle East.

South African rand regained lost ground

At 1505 GMT, the rand traded at 18.9350 against the dollar, over 0.5% weaker than its previous close. The rand had weakened in the past couple of days on soaring U.S. Treasury yields and a sharp spike in local inflation. The dollar last traded around 0.07% weaker against a basket of global currencies. “Global markets are volatile, which creates risks of spillover, but overall, the rand seems unlikely to go very far in either direction,” analysts at Rand Merchant Bank said in a note earlier.

Local investors will turn their attention towards monthly producer price inflation figures this week for clues on the health of Africa’s most industrialised economy. Shares on the Johannesburg Stock Exchange closed lower, with the blue-chip Top-40 index down 1.1%. South Africa’s benchmark 2030 government bond was stronger in early deals, with the yield down 8.5 basis points to 10.800%.

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U.S. Dollar

Reuters: The dollar touched the closely watched 150 level against the yen on Friday, before falling back again, as investors positioned for the Federal Reserve to hold rates higher for longer. A move above 150 is seen in the market as having the potential to spur an intervention by Japanese monetary officials concerned about the currency weakening too far. It reached 150.165 on Oct. 3 before quickly dropping back to 147.3, but market participants say it is not clear whether the move resulted from an intervention by the Ministry of Finance or was caused by market nerves and trading stop losses or other automated trades being triggered.

“The market is obviously very mindful that the 150 threshold is a potential precursor for the uncertainty of having the MOF on the other side of it,” said Jeremy Stretch, head of G10 currency strategy at CIBC Capital Markets. Analysts say that the speed and context of the move and how far it goes above 150 will likely influence whether the Ministry of Finance steps in. The dollar was last up 0.11% on the day against the Japanese currency at 149.85 yen. The dollar rally has stalled since the index hit a 10-month high on Oct. 3 even as benchmark 10-year Treasury yields continue to hit fresh 16-year highs.

Adam Button, chief currency analyst at ForexLive, said that the potential for MOF intervention was limiting dollar gains. “I think the dollar would otherwise be stronger if not for the threat of intervention from Japanese monetary officials,” he said. “Given fixed income and equities, the dollar should be stronger than it is this week, and I think it’s just a matter of time until it materializes.” Some analysts also note that the number of investors holding dollars has become crowded, which may be holding back further rallies.

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“The greenback continues to draw smaller benefits from strong U.S. data and high rate advantage than it should, likely due to its overbought status, but upside risks remain predominant,” ING analyst Francesco Pesole said in a note on Friday. The index was last at 106.14, down 0.06% on the day. The euro rose 0.04% to $1.0593. The dollar eased on Thursday after Fed Chair Jerome Powell said rising market interest rates could reduce the need for action by the central bank.

The odds of a Fed hike in December have dropped to 24%, from 39% before Powell’s comments, while a November pause is seen as a sure thing, according to the CME Group’s Fed Watch Tool. But the U.S. central bank is not expected to begin cutting rates until June. Investors are also watching the Middle East for any indications of an escalation in the war between Israel and Hamas. The Swiss franc hit an almost six-week high against the greenback earlier on Friday, before falling back to last trade at 0.8917. The Swiss currency has been a popular safe haven as a result of rising geopolitical tensions.

The Swissie also hit its highest against the euro since 2015, when the Swiss National Bank scrapped its peg between the two currencies. Elsewhere, the pound fell to a five-month low against the euro after a series of data releases showed a collapse in British consumer confidence in October following weak retail sales the month before. Sterling was last up 0.14% against the dollar at $1.2158.

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British Pound

Reuters: The pound was at its weakest against the euro in five months on Friday and was also under pressure versus the dollar as weak retail sales data reinforced fears about the health of the British economy. The euro climbed as far as 87.40 pence, its highest since May, with the European common currency also set for its best week against the pound in a month. The pound is typically sensitive to swings in global sentiment and has fallen alongside assets like stocks as the war in the Middle East and the relentless rise in U.S. yields sends investors to safe havens.

Friday’s moves were also driven by data that showed British retail sales fell more than expected in September, against a backdrop of broader cost of living pressures that could see the economy shrink overall in the third quarter. Retail sales volumes dropped by 0.9% on the month after a 0.4% rise in August, the Office for National Statistics said, a much bigger decline than the 0.2% fall economists had forecast in a Reuters poll. “We saw some rather soft UK numbers this morning. Weak retail sales and a noticeable drop in consumer confidence, though both are among the most volatile UK data releases,” said Francesco Pesole, FX strategist at ING in a morning note. “We have seen EUR/GBP rally above 0.8700 recently, which starts to look slightly overdone.”

The pound also dipped against the dollar though was last flat on the day at $1.2138, still holding above a six month low of $1.20585 hit earlier this month. The pound has also been suffering against safe haven currencies and is trading at 1.0819 Swiss francs, its weakest since September 2022. The pound has fallen 3% against the franc so far this month, which, if sustained, would be its biggest monthly fall since June.

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Global Markets

Reuters: Asian shares hit one-year lows Monday as the risk of a wider conflict in the Middle East clouded sentiment in a week laden with data on U.S. growth and inflation as well as earnings from some of the world’s largest tech companies. Bonds were also under pressure as U.S. 10-year Treasury yields crept to within a whisker of 5.0%, pushing borrowing costs up across the globe and testing equity valuations. Washington warned over the weekend of a significant risk to U.S. interests in the Middle East as ally Israel pounded Gaza and clashes on its border with Lebanon intensified.

The European Central Bank and Bank of Canada also hold policy meetings and, while no hikes are expected, investors will be sensitive to guidance on futures moves. The recent surge in bond yields has tightened monetary conditions without the central banks having to do anything, allowing the Federal Reserve to signal it will likely stay on hold at its policy meeting next week. Indeed, futures imply around a 70% chance the Fed is done tightening for this cycle and are flirting with the chance of rate cuts from May next year.

The jump in yields has challenged equity valuations and dragged most of the major indices lower last week, while the VIX ‘fear index’ of U.S. stock market volatility hit its highest since March. On Monday, MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.5% to its lowest in almost a year. China’s blue chip index lost 0.6% to its weakest since early 2019. Japan’s Nikkei eased 0.6%, as did South Korea’s market. EUROSTOXX 50 futures and FTSE futures were flat. Both S&P 500 futures and Nasdaq futures added 0.2%, underpinned by hopes a rush of earnings reports this week will provide some support.

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Mega caps Microsoft, Alphabet, Amazon and Meta Platforms are all reporting. IBM and Intel are also on the docket. Profits should be supported by the strength of consumer demand with figures on U.S. gross domestic product this week expected to show annualised growth of a heady 4.2% in the third quarter, and nominal annualised growth possibly as high as 7%. “At the same time, last quarter’s modest rise in hours worked points to a strong productivity gain and surge in corporate profits,” wrote JPMorgan chief economist Bruce Kasman in a note.

“As corporate and household income share the benefits of this nominal activity surge, the underlying resilience of the U.S. private sector is being reinforced.” This U.S. outperformance has underpinned the dollar, though the threat of Japanese intervention has capped it around 150.00 yen at least for the moment. The dollar was last trading at 149.93 yen, just below the recent peak of 150.16. Yields in Japan were also on the rise on speculation the Bank of Japan was discussing a further tweak to its yield curve control policy, which might be announced at its policy meeting on Oct. 31.

The euro was flat at $1.0578, while the Swiss franc held firm at 0.8946 per dollar having benefited from safe haven flows over the past couple of weeks. Gold has likewise attracted a safety bid to stand at $1,973 an ounce, having hit its highest since May last week. Oil prices gave back some ground in the absence of any disruption to supplies from the Middle East, at least for now. Brent was last down 73 cents at $91.43 a barrel, while U.S. crude eased 82 cents to $87.26.

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Published by the Mercury Team on 23 October 2023

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