South African rand slipped as central bank warns on price pressure

Reuters: The South African rand slipped on Tuesday against the dollar, as the central bank warned core inflation in the country remained elevated and a leading business cycle indicator fell.

South African rand slipped

At 1530 GMT, the rand traded at 18.3825 against the dollar, about 1.35% weaker than its closing level on Monday. The dollar index, which measures the greenback against six major currencies, was last up around 0.57%. The South African Reserve Bank said in its April Monetary Policy Review that headline inflation had peaked but core inflation remained elevated, putting upward pressure on the consumer prices outlook. Earlier in the day, the SARB’s leading indicator for February decreased 0.7% month on month, falling for the third consecutive month.

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The indicator collects data on vehicle sales, business confidence, money supply and other factors to gauge the outlook for Africa’s most industrialised economy. Rand moves could be volatile later this week as upcoming public holidays mean many traders will be away from their desks from Wednesday’s close until next Tuesday. Globally, the investor mood was cautious in a busy week for corporate earnings and economic data. Markets will look to coming U.S. data releases for clues about the Federal Reserve’s next policy moves and are also grappling with financial stability concerns highlighted by recent turmoil in U.S. and Swiss banks.

Shares on the Johannesburg Stock Exchange fell, with both the broader all-share index and the blue-chip Top-40 index ending nearly 0.3% lower. South Africa’s benchmark 2030 government bond was weaker, with the yield up 4.5 basis points at 10.225%.

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British Pound

Reuters: The pound fell on Tuesday, in line with a decline in a number of European currencies, as nervousness around the outcome of the earnings season and the outlook for the global economy gave the dollar an edge. In UK news, Britain recorded a bigger-than-expected budget deficit of 21.53 billion pounds ($26.87 billion) in March, official data showed on Tuesday, capping off the fourth-highest borrowing for a financial year since records started. A Reuters poll of economists had pointed to public sector net borrowing, excluding state-owned banks, of 20 billion pounds. Sterling on Tuesday was trading down 0.2% against the dollar at $1.2463 and down 0.1% against the euro at 88.53 pence. The pound has been one of the strongest performing major currencies against the dollar so far this year, with a gain of 3.1%, neck-and-neck with the euro for second place behind the Swiss franc, which has climbed nearly 4.5%.

Inflation running at a surprisingly hot 10.1% in March and evidence of solid service sector demand have prompted many to reassess how much more the Bank of England may have to raise rates this year. “We still think that markets are over-estimating the amount of further tightening (71 basis points in total, including next week’s hike, before reaching the peak), but unless there is a clear push-back by the BoE at the policy meeting, the pound may not lose its solid momentum just yet,” ING’s Francesco Pesole said. Money market rates show traders believe there is a 99% chance the Bank of England will raise interest rates by a quarter of a point in May to 4.5%. Further out, they now expect a peak of 4.9% by November this year, compared with a terminal rate of 4.5% in August just one month ago. Goldman Sachs analysts said on Monday they believe the BoE will take rates to 4.7% this year, up from a previous forecast for a peak in rates of 4.3%, based on sticky inflation, ongoing wage growth and strong business activity.

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Sterling has found favour with speculators in the past year and now boasts the first bullish position against the dollar since last February, according to weekly data from the U.S. Commodity Futures Trading Commission. Investors overall hold a $101 million long position in the pound, mostly thanks to an increase in asset manager holdings of sterling. But, according to Kamal Sharma, who is director of G10 currency strategy at Bank of America, sterling might not have much more room to gain. “One of our key calls this year is that GBP should benefit from the removal of tail risk premium and news flow becoming ‘less bad’,” he said in a recent note. “However, this may be as good as it gets: the best of UK data surprises may be behind us and there is little encouragement that international investors are returning to UK asset markets – a necessary condition for medium-term optimism.”

US Dollar

Reuters: The U.S. dollar and the yen were steady on Wednesday, holding onto overnight gains as concerns over the U.S. banking sector and economy hit sentiment, while the Aussie slid after easing inflation suggested less pressure to raise interest rates. The dollar index , which measures the currency against six major rivals, nudged 0.01% higher to 101.80 after a 0.5% increase overnight. The index is down 0.76% for the month. Shares of First Republic Bank slid nearly 50% on Tuesday after it reported a more than $100 billion plunge in deposits in the quarter, battered by lost confidence in the banking sector. It faces dwindling and tough options to turn around its business with the creation of a “bad bank” or asset sales possibilities, a source familiar with the matter told Reuters. “The USD increase is the typical response to bad news, even if the bad news is based in the United States,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia. “While concerns about small U.S. banks remain, we expect the USD to stay elevated.”

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The Japanese yen strengthened 0.13% to 133.53 per dollar, after gaining about 0.4% on Tuesday. The traditional safe-haven gained 2.6% in March amid fears of a widespread banking crisis but has lost 0.6% in April as the worries eased. Also weighing on sentiment was fresh economic data. U.S. consumer confidence dropped to a nine-month low in April, data overnight showed, heightening the risk that the economy could fall into recession this year. The U.S. Richmond Fed manufacturing index slid as well, down to -10 in April, the fourth straight month of contraction. Markets are now pricing in a 76% chance of a 25 basis point increase when the Federal Reserve meets next week, CME FedWatch tool showed, down from a 90% chance at the start of the week. DBS strategists said data and sentiment could shift pricing as the Fed is in a blackout ahead of its policy meeting next week. They said that the market participants are not comfortable pricing in a full increase for May since the bank problems.

“We are wary of downside risks and think that the widely expected last 25bps hike next week might not be quite cast in stone,” the strategists said in a note. Investor attention will firmly be on the slate of central bank meetings in the next few weeks with the Bank of Japan, under the new Governor Kazuo Ueda, holding its policy meeting later this week. Meanwhile, the Federal Reserve said it will publish its internal review of its supervision of Silicon Valley Bank on Friday. The review, which is being led by Fed Vice Chairman for Supervision Michael Barr, follows the regional bank’s abrupt failure last month. It will include policy recommendations and confidential supervisory information that the Fed typically does not disclose to the public, Barr has said. The euro was up 0.02% to $1.0974, but has drifted away from the 10-month high it touched this month. Sterling was at $1.2413, up 0.04% on the day, while the kiwi eased 0.07% to $0.613.

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The Australian dollar slid to a six-week low of $0.6604 before settling down 0.3% at $0.6605 after data showed inflation eased from 33-year highs in the first quarter, while core inflation dipped below forecasts. ING economists said a cooler-than-estimated inflation report should be enough to “encourage thoughts that the recent pause in rate tightening by the Reserve Bank of Australia may end up being more than that, and confirm that 3.6% was the peak in rates this cycle.” Investors reacted to the data by lengthening the odds on the RBA resuming raising rates at its May 2 meeting, having paused in April after a streak of 10 straight increases.

Global Markets

Reuters: U.S. stock futures bounced as buybacks and earnings beats boosted tech giants in after-hours trade, although Asian shares wallowed at one-month lows on Wednesday, with investors turning nervous on the outlook for the world’s two biggest economies. Nasdaq futures were up 1.4% and S&P 500 futures up 0.5% following better-than-expected profits at Microsoft and a $70 billion stock buyback at Google parent Alphabet. Both stocks rose after the bell. However, U.S. markets fell sharply overnight and MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.4% in early trade as investors took stock of softening U.S. data and fresh regional bank jitters. First Republic Bank shares were sold to a record low after the bank disclosed a $100 billion plunge in deposits. A source told Reuters the bank is considering asset sales.

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The Wall Street Journal’s “Fed whisperer” Nick Timiraos wrote an article titled “Why the banking mess isn’t over,” including comments from former Dallas Fed President Robert Kaplan saying bank issues have a long way to run. The S&P 500 dropped 1.6% overnight and the Nasdaq nearly 2%. Bonds rallied sharply and interest rate futures markets priced in a higher chance of Fed cuts later in the year. The U.S. dollar rose broadly against most majors, save for the safe-haven yen. “Clearly, the fear factor drove dollar gains,” said analysts at Mizuho. “The fear of contagion and the repeated mantra of isolated incidents has inevitably led to ‘shy’ and yield seeking deposits seeking to bank with the U.S. Treasury,” they said, referring to the broad rally in bonds.

Two-year Treasury yields dropped 18.7 basis points overnight and were steady at 3.9221% in Asia. Ten-year yields fell nearly 12 bps, their sharpest drop in more than a month. Yields fall when bond prices rise. Elsewhere Australian inflation eased from 33-year highs, nudging the Aussie dollar to a six-week low at $0.6612 and firming up market wagers that the central bank will keep rates on hold at its meeting next week. The euro was last at $1.0975. Gold was pinned just below $2,000 an ounce. Brent crude futures hovered at $80.98 a barrel having dropped almost 4% overnight with the risk-averse mood.

Published by the Mercury Team on 26 April 2023

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