South African Rand retreated on prolonged power cuts

Reuters: The South African rand retreated on Friday, bringing last week’s rally to a halt as prolonged power blackouts and expectations that the central bank will leave its main interest rate on hold next week weighed on the investor mood.

South African Rand retreated

The risk-sensitive rand has been a big beneficiary of data this week showing cooling U.S. inflation, which has stoked speculation the Federal Reserve could pause its interest rate hikes after this month and driven the dollar to its weakest since April 2022. The rand broke below 18 to the dollar for the first time in three months on Thursday and as of Friday’s open was up more than 5% for the week. But by 1045 GMT, the rand had moved back above 18 to the dollar and was trading down about 0.7% from its Thursday closing level at 18.05.

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Rand Swiss portfolio manager Gary Booysen said the fact the South African Reserve Bank was likely to leave its repo rate unchanged at next week’s monetary policy meeting could prompt investors to sell the rand in advance, given the Fed was expected to hike once more in a decision due on July 26. “There is another risk factor that poses a threat to the South African rand – the return of level 6 load shedding. Historically, there has been a correlation between power cuts and a weakening rand,” Booysen added.

South Africa’s struggling utility Eskom said on Thursday that it would extend ‘Stage 6’ power cuts, its highest level on record, into the weekend as cold weather drives up demand and power station breakdowns constrain supply. Stage 6 outages mean many businesses and households are in the dark for 10 hours or more per day. On the Johannesburg Stock Exchange, the blue-chip Top-40 index last traded about 0.4% stronger. The benchmark 2030 government bond was weaker, with the yield up 4.5 basis points to 10.430%.

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U.S. Dollar

Reuters: A bruised dollar took respite on Monday after suffering its worst weekly drop of the year, as traders waited on economic data and policy decisions before selling it down any further. The euro, which jumped 2.4% last week to a 16-month high, held just below that peak at $1.1223. The yen , also up 2.4% last week, held at 138.56 per dollar. Chinese growth data landed a little above low expectations on Monday, but without sparking much currency market response as traders had already priced in a sluggish quarter and are waiting to see if the government steps up stimulus to promote spending.

The Australian and New Zealand dollars pulled back slightly, with the Aussie last at $0.6821 – off last week’s peak of $0.6895 – and the kiwi down 0.2% at $0.6355 after hitting a five-month high of $0.6412 on Friday. “The data suggests that China’s post-COVID boom is clearly over,” said Commonwealth Bank of Australia strategist Carol Kong. “But markets already had low expectations, and reaction from here is fairly limited.” Last week’s dollar slide began with yen buying, as investors unwound yen-funded positions in emerging markets, but extended sharply after softer-than-expected U.S. inflation data leant support to wagers that U.S. interest rates will soon peak.

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Hikes are expected from the Federal Reserve and European Central Bank next week, but beyond that market pricing implies the Fed will likely stop, before cuts next year, while in Europe another hike probably beckons. “The FX market is front running possible normalisation of Fed policy in 2024,” said Chris Weston, head of research at broker Pepperstone in Melbourne. “The question then is whether the dollar sell-off has gone too far and we are at risk of mean reversion early this week.” The U.S. dollar index dropped 2.2% last week, its sharpest one-week fall since November, and was steady at 99.936 in the Asia session.

Sharp gains in the yen have slowed as traders weigh whether the ultra-dovish Bank of Japan is really likely to make any shifts at its policy meeting next week, given rhetoric suggests they are in no hurry. The Swedish and Norwegian crowns made gains of more than 5% on the dollar last week, and have paused for breath. At $1.3086 sterling was parked just below last week’s 15-month peak. “The dollar may remain on the backfoot as the market re-positions itself for a less hawkish Fed,” said Rabobank’s head of FX strategy, Jane Foley. “That said, the outlook for the latter few months of the year is less clear cut,” she said. “By then other major central banks including the ECB will also likely have reached their peak policy rates interest rate dynamics may therefore swing back in favour of the dollar.”

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British Pound

FXStreet: GBP/USD remains sidelined around 1.3090 amid Monday’s early Asian session, after reversing from the highest levels in 15 months. In doing so, the Pound Sterling struggles to cheer news of the UK’s biggest trade deal after Brexit due to the economic fears surrounding Britain. Also challenging the Cable buyers are the latest doubts on the market’s concerns about the Federal Reserve during the two-week blackout period for the US central bank policymakers ahead of the late July monetary policy meeting. The UK’s official joining of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, unveiled Sunday, marks London’s biggest trade victory since Brexit. However, a slump in the UK’s home price and fears of witnessing more medical strikes challenge the trade optimism. Additionally, the news that the UK consumer group calls for government action on grocery prices, shared via Reuters, also raise grim concerns about the UK economy and prod the GBP/USD bulls.

Furthermore, recently mixed UK data and the upbeat US consumer inflation clues also prod the GBP/USD bulls, allowing the Cable pair to retreat after posting the biggest weekly gain since November 2022. In the last week, the UK Gross Domestic Product slid to -0.1% MoM for May versus -0.3% expected and 0.2% prior. Further, the Industrial Production for the said month slumped to -0.6% MoM from -0.2% previous readings and -0.4% market forecasts whereas the Manufacturing Production registered -0.2% MoM figure for May compared to -0.5% expected and -0.1% prior. Following the mostly downbeat data, UK Chancellor Jeremy Hunt said that “while an extra Bank Holiday had an impact on growth in May, high inflation remains a drag anchor on economic growth.” The policymaker also added that the best way to get growth going again and ease the pressure on families is to bring inflation down as quickly as possible. Our plan will work, but we must stick to it.

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On the other hand, the preliminary reading of the University of Michigan’s Consumer Confidence Index rose to 72.6 from 64.4 in June, versus the market’s expectations of 5.5. Further details suggested that the one-year and 5-year consumer inflation expectations per the UoM survey edged higher to 3.4% and 3.1% in that order versus 3.3% and 3% respective priors. Before that, the US Consumer Price Index and Producer Price Index for June dropped to 3.0% and 0.1% on a yearly basis from 4.0% and 0.9% YoY in that order, which in turn drowned the US Dollar and propelled the EUR/USD pair toward the highest level since February 2022.

Further, comments from US Treasury Secretary Janet Yellen and New Zealand Chris Hipkins flag fears emanating from China and put a floor under the US Dollar, which in turn allows the GBP/USD bulls to take a breather. While portraying the mood, S&P500 Futures print mild losses whereas the US Treasury bond yields lick their wounds after witnessing a downbeat weekly close. Moving on, the GBP/USD pair traders should keep their eyes on this week’s UK inflation data, as well as the US Retail Sales, for clear directions as markets seem uncomfortable with the Bank of England’s hawkish policy amid economic fears.

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Global Markets

Reuters: Asian shares slipped on Monday as lacklustre Chinese economic data were not as bad as the worst fears, but still stoked market impatience with the lack of major fiscal stimulus from Beijing. China reported economic growth of 0.8% in the second quarter, above the 0.5% forecasted, while the annual pace slowed more than expected to 6.3%. Industrial output topped expectations with a rise of 4.4%, while retail sales missed by a tick at 3.1%. That followed figures out over the weekend showed China’s new home prices were unchanged in June, the weakest result this year. “The data suggests that China’s post-COVID boom is clearly over. The higher-frequency indicators are up from May’s numbers, but still paint a picture of a bleak and faltering recovery and at the same time youth unemployment is hitting record highs,” said CBA economist Carol Kong. “Markets have already adjusted lower their expectations for stimulus, and our base case is that there won’t be a substantial package.”

Chinese blue chips were down 1.0%, while the yuan was a fraction lower . MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, though that follows a 5.6% rally last week. Japan’s Nikkei was closed for a holiday, though futures were trading 0.2% lower. EUROSTOXX 50 futures and FTSE futures both slipped 0.4%. S&P 500 futures and Nasdaq futures were both off a fraction, but that followed hefty gains last week. Tesla is the first of the big tech names to report this week, while a busy earnings schedule includes Bank of America, Morgan Stanley, Goldman Sachs and Netflix.

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Data on U.S. retail sales are expected to show a rise of 0.3% ex-autos, continuing the slower trend but solid enough to fit into the market’s favoured soft-landing theme. “We continue to look for a modest contraction to take hold toward the end of the year, but the path to a non-recessionary disinflation is starting to look more plausible,” said Michael Feroli, an economist at JPMorgan. “We expect Fed officials cheered the latest inflation developments, but declaring victory with sub-4% unemployment, and over 4% core inflation, would be reckless.”

As a result, markets still imply around a 96% chance of the Fed hiking to 5.25-5.5% this month, but only around a 25% probability of yet a further rise by November. They have also priced in at least 110 basis points of easing for next year, starting from March, which saw two-year bond yields down 18 basis points last week. That predicted policy easing is considerably more aggressive than what is priced in for the rest of the developed world, a major reason the U.S. dollar has turned tail.

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The dollar was softer at 138.55 yen , but still up from a trough of 137.25, after a loss of 2.4% last week. The euro was firm at $1.1226 , having also surged 2.4% last week to clear its former top for the year at $1.1096. Sterling stood at $1.3089 , having risen 1.9% last week, with investors anxiously awaiting UK inflation figures later in the week where another high result would add to the risk of further sizable rate hikes. “A lift in the core CPI can encourage financial markets to price in even more tightening from the Bank of England and push GBP/USD up towards upside resistance at $1.3328,” said analysts at CBA in a note.

The dollar index hovered at 99.989 , after shedding 2.2% last week. The drop in bond yields was underpinning non-yielding gold at $1,954 , after boasting its best week since April. Oil prices have also been supported by cuts in OPEC supply, seeing crude gain for three weeks in a row before running into profit taking. Prices were also pressured as Libya resumed production over the weekend. Brent dropped 71 cents to $79.16 a barrel, while U.S. crude fell 66 cents to $74.76.

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Published by the Mercury Team on 17 July 2023

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