South African Rand slipped against Dollar after strong US jobs data

Reuters: The South African rand slipped against the dollar on Friday after stronger-than-expected U.S. jobs data signalled that the Federal Reserve could continue with its rate hike cycle. At 1512 GMT, the rand traded at 18.4200 against the dollar, down around 0.7% from its closing level on Thursday.

South African Rand slipped

Non-farm payrolls in the United States grew by 253,000 in April, above the 180,000 predicted by economists, pointing to sustained labour market strength that could compel the Fed to keep interest rates higher for longer to tame inflation. The dollar index jumped on the report before paring gains to trade near its previous close of 101.34.

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The risk-sensitive rand often takes cues from global drivers such as U.S. economic data in the absence of local catalysts. Shares on the Johannesburg Stock Exchange recovered from their previous day’s tumble, ending the week higher. The blue-chip Top-40 index closed up 1.13%, while the broader all-share index was 1.12% higher. “Equity markets look to have been given a late week reprieve after U.S. employment data saw the U.S. leading the rest of the world higher in afternoon trade,” said Shaun Murison, senior market analyst at IG. South Africa’s benchmark 2030 government bond was weaker, with the yield up 4 basis points at 10.130%.

US Dollar

Reuters: The dollar was catching its breath on Monday after dropping last week when the Federal Reserve hinted at an end to the U.S. rate increase cycle, with traders turning their focus to U.S. inflation and bank lending data for the week ahead. Sterling, which hovered at $1.2633, just below an 11-month high hit on Friday, was also in traders’ minds ahead of an expected Bank of England rate increase on Thursday. The euro, which has rallied nearly 16% from September lows, was losing a little bit of momentum at $1.1021 and has struggled to break resistance at $1.11. The yen slipped slightly, reflecting Friday’s move higher in U.S. bond yields that followed strong jobs data. The dollar/yen was last 0.2% higher at 135.05. Last week the Federal Reserve and the European Central Bank each raised rates by 25 basis points and offered varying degrees of caution about the outlook, which markets took as signals that rate rises are slowing or stopping.

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U.S. interest rate futures are pricing about a one-third chance of a rate cut as soon as July, according to the CME FedWatch tool – even though stronger-than-forecast U.S. jobs data released on Friday suggests that might be premature. “The Fed has tended to guide away from the possibility of rate cuts this year, which is somewhat at odds with a rates market which is pricing in cuts,” HSBC analysts said in a note. “If the Fed is proved right over the course of 2023, then it will make it harder for the dollar decline to extend,” the analysts wrote. “But for the time being, the market is likely to run with the theme of a peak in Fed rates justifying a clear peak in the dollar.”

The U.S. dollar index dropped for a second week in a row last week, losing about 0.4%. The Antipodean currencies also logged solid gains last week, but remain short of clear breaks into new territory. The Aussie dollar was steady at $0.6749 in early trade but faces a hurdle around $0.68. The New Zealand dollar held at $0.6298, with resistance around $0.6365. Later Monday, the Fed’s loan officer survey might show whether and how hard banks are tightening up on credit after three U.S. lenders failed over recent weeks – which could weigh on the dollar if it puts downward pressure on interest rates.

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Traders will also be watching headlines from Capitol Hill as lawmakers attempt to negotiate an impasse over the looming U.S. debt ceiling, with the Treasury Secretary warning the government might be unable to pay debts by June 1. U.S. inflation data is due on Wednesday. “There is a risk that regional bank issues could escalate, posing a broader risk to the financial system and taking the dollar (higher),” said Standard Chartered’s head of G10 FX research, Steve Englander. “However, the resilience of big banks makes that unlikely, in our view,” Englander said. “We think that the escalation of debt-ceiling concerns is a more likely source of risk-off dollar strength via demand for immediate dollar liquidity.”

British Pound

Reuters: The pound rose to just shy of a one-year high against the dollar on Friday, and to a one-month high against the euro, as traders eyed the Bank of England’s interest rate decision this week. Sterling was up 0.21% at $1.26 on Friday, after reaching $1.263 earlier in the session, the highest since late May last year. The euro was down 0.14% against the pound at 87.49 pence, after earlier falling to 87.42 pence, the lowest since April 6. The pound has received a boost from the U.S. Federal Reserve meeting this week, analysts said, when the central bank raised rates by 25 basis points but signalled that it may stop there. U.S. employment data, out at 1230 GMT on Friday, will provide clues as to the Fed’s likely next move.

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By contrast, many analysts think the Bank of England will have to keep raising rates, given that inflation is much stronger in Britain – running at 10.1% year-on-year in March, compared with 5% in the United States. “The Fed dropping some of the hawkish language from its statement this week allowed markets to solidify their view that this is the end of the hiking cycle in the U.S.,” said Joe Tuckey, head of FX analysis at broker Argentenx. “Sterling has been able to capitalise on this.” When interest rates look like they’re going to rise in one country but stay flat in another, it can make investments in the former country look more attractive, potentially boosting the currency. A stronger-than-expected, although still lacklustre, economy has also supported the pound. Economists have been on recession watch, but one is yet to materialise, in part because of a drop in energy prices.

Meanwhile, a rapid slowdown in U.S. inflation and the Fed approaching the end of its hiking cycle has sent the dollar down against a range of currencies. The dollar index, which measures the U.S. currency against its major peers, was down slightly on Friday and was 0.34% lower for the week. Sterling’s perkiness against the euro can also partly be explained by the outlook for central banks, said Chris Turner, global head of markets at ING. The European Central Bank on Thursday raised rates by 25 bps, a step down in the pace of monetary tightening. Euro zone inflation has also cooled quicker than Britain’s. “Sterling is doing better. Part of that owes to the ECB, which was less hawkish than expected and that took some of the steam of the euro,” Turner said.

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Traders broadly expect the Bank of England to raise rates by 25 basis points to 4.5% on Thursday next week, according to pricing in derivatives markets. They then see rates climbing to a peak of around 4.8% later in the year. Dominic Bunning, head of European FX research at HSBC, said the pound could rise to around $1.30 later in the year. “This is not a story of an absolute positivity,” he said. “We’re not looking for much, much bigger gains here.”

Global Markets

Reuters: Asian shares crept higher on Monday as investors braced for a week where U.S. inflation data will test wagers the next move in interest rates will be down, while worries about a possible credit crunch weighed on the dollar. Friday’s robust U.S. payrolls report has already delivered a setback to easing hopes and any upside surprise on consumer prices would challenge bets for a rate cut as soon as September. Forecasts are for a rise of 0.4% in April for both the headline and core CPI, with the annual pace of core inflation slowing just a tick to 5.5%. Later Monday, the Federal Reserve’s survey of loan officers will draw an unusual amount of attention as markets seek to gauge the impact of regional banking stress on lending. “The survey should point to further broad-based tightening in bank lending standards,” said Bruce Kasman, head of economic research at JPMorgan. “Continued stress in the banking system does, of course, increase concern that a disruptive financial market event is on the horizon,” he added. “Though our analysis suggests that the impact of a credit tightening against an otherwise healthy backdrop tends to be limited.”

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Caution made for a slow start in markets and MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.3%, while Japan’s Nikkei eased 0.3%. S&P 500 futures and Nasdaq futures were both off 0.1%, after jumping on Friday in the wake of Apple’s upbeat results. While the S&P 500 is up almost 8% for the year so far, all of that is due to just five mega stocks which have collectively risen by 29% so far this year and trade at a 49% premium to the rest of the index. Bond markets were still stinging from the strong payrolls report with U.S. two-year yields up at 3.95% after briefly getting as low at 3.657% last week. Futures imply a near 90% chance the Fed will keep rates steady at its next meeting in June, and a 75% probability of a cut in September.

The market is still pricing in at least one more hike from the European Central Bank, while the Bank of England is widely expected to lift its rates by a quarter point on Thursday. The diverging outlook on rates has underpinned the euro and pound, with the latter hitting a one-year high on the U.S. dollar last week. The euro was holding at $1.1018 on Monday, just short of its recent top of $1.1096. “While it is premature to get too ‘beared up’ on the dollar until a clearer peak in U.S. rates is seen, the U.S. banking sector travails that have no easy/costless solutions, continue to make for a mildly bearish medium-term story,” said Alan Ruskin, head of global FX strategy at Deutsche Bank. “Certainly it imposes more growth constraints and a greater stagflationary bias than for major competing economies.” The dollar has fared better on the yen as the Bank of Japan remains the only central bank in the developed world to not have tightened policy.

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The dollar stood at 135.19 yen, with the euro at 148.93 and not far from its recent 15-year peak of 151.55. The prospect of a pause in U.S. rate hikes has been a boon for non-yielding gold which was holding at $2,015 an ounce after nearing a record high last week. Oil prices have been going the other way as fears of a global economic slowdown outweighed planned output cuts to see U.S. crude shed more than 7% last week. Brent was last up 3 cents at $75.33 a barrel, while U.S. crude added 5 cents to $71.39 per barrel.

Published by the Mercury Team on 8 May 2023

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