South African rand slipped as investors await budget speech

Reuters: The South African rand slipped on Tuesday to its lowest level this year, with investors awaiting the finance minister’s budget speech due on Wednesday that is likely to provide cues on the government’s policy trajectory.

South African Rand slipped

At 15:24 GMT, the rand traded at 18.2875 per dollar, about 1.04% weaker than its previous close, after earlier hitting its lowest level for 2023 of 18.3225. The dollar was up about 0.13% at 104.04 against a basket of global currencies, trading it reached on Friday. Finance Minister Enoch Godongwana will deliver his 2023 budget speech on Wednesday. Apart from presenting updated revenue, expenditure and economic growth forecasts, he is expected to outline a plan for the government to take on part of the debt of struggling state power utility Eskom.

“The ZAR is poised for a big move in either direction tomorrow,” said ETM Analytics in a research note. The rand is on the defensive as one of the worst-performing emerging market currencies this year and is susceptible to any bad news, it said. Also this week, global watchdog the Financial Action Task Force (FATF), which sets standards on combating money laundering and illicit financing, could add South Africa to its “grey list” at meetings in Paris, which could hurt local asset prices.

Shares on the Johannesburg Stock Exchange fell, weighed down by Sibanye Stillwater Ltd and Sasol Ltd, which both ended over 5% lower. Sibanye said it expected its annual profit to have slumped by as much as 51%, while mixed half-year results by Sasol failed to impress investors. Overall on the JSE, the broader all-share index fell 1.28%, while the top-40 index closed down 1.36%. The government’s benchmark 2030 bond was lower, with the yield up 6.5 basis points at 10.255%.

British Pound

Reuters: The pound strengthened on Tuesday after data showed an unexpected bounce in British business activity, suggesting the economy could be sidestepping a deep recession. The pound gained 0.4% against the dollar to $1.2088 and also firmed against the euro, with the European common currency dropping 0.72% to 88.17 pence, which would be its largest daily percentage fall in a month. The move followed the release of Britain’s preliminary “flash” Purchasing Managers’ Index, which jumped to 53.0 in February from 48.5 in January, above the 50 threshold for growth for the first time since July. It also beat all forecasts in a Reuters poll of more than 20 economists, which had pointed to a reading of 49.0.

“It’s another indicator that the UK economy is proving more resilient than people had feared at the end of last year, which is helping to support the pound in the short term,” said MUFG senior currency analyst Lee Hardman. “The question is whether this can be sustained as the British economy is still facing significant challenges.” An improving British economy drives a stronger pound on its own terms and because it makes the Bank of England more likely to continue increasing interest rates in an effort to bring inflation under control.

European activity data also came in better than expected, but Hardman said the pound’s gains against the euro were partly because of pricing that reflected more pessimism for the British economy than the euro zone’s. Separate data released earlier in the day showed Britain’s government ran an unexpected budget surplus in January.

US Dollar

Reuters: The dollar and sterling were buoyant on Wednesday, after a surprise rebound in business activity in the United States and the UK raised the likelihood that their respective central banks would have further to go in raising interest rates. Elsewhere, the kiwi surged after the Reserve Bank of New Zealand (RBNZ) on Wednesday raised rates by an expected 50 basis points, but reiterated that inflation remains too high and employment is beyond its maximum sustainable level. Data released on Tuesday showed that U.S. business activity unexpectedly rebounded in February to reach its highest level in eight months, while the UK flash composite Purchasing Managers’ Index (PMI) similarly surged to 53.0 this month, above the 50 threshold for growth for the first time since July.

The dollar rose against most major currencies after the upbeat data save for sterling, which jumped 0.6% on Tuesday. It was last 0.05% lower at $1.2107. In the euro zone, its flash composite PMI likewise climbed to a nine-month high of 52.3 in February, supported by surprisingly strong services growth. The euro, however, failed to benefit from the data as it slid 0.36% in the previous session. It was last 0.04% higher at $1.0652. “It was kind of an issue of relativities in a sense, that while the services sectors performed better across the board, that extra lift that sterling got, was because of that very, very strong performance,” said Rodrigo Catril, senior currency strategist at National Australia Bank. “I think the euro is still in a sort of more difficult situation, given that there’s a general sense that the ECB still has more work to do, and that puts a little bit of strain in terms of their growth outlook.”

Against the Japanese yen, the dollar rose to a two-month high of 135.23 in the previous session, and slipped marginally to 134.91 in early Asia trade on Wednesday. The U.S. dollar index stood at 104.13, having gained 0.3% on Tuesday. The rebound in U.S. business activity comes on the back of a recent slew of resilient economic data pointing to a still-tight labour market, sticky inflation and robust retail sales in the world’s largest economy. Markets have since raised their expectations of how high the Federal Reserve would need to lift rates to tame inflation, sending U.S. Treasury yields surging. The two-year yields jumped to an over three-month high of 4.738% in the previous session, and last stood at 4.6933%. The benchmark 10-year note yields peaked at 3.9660% in early Asia trade on Wednesday, its highest since last November.

In other currencies, the Aussie slid after data showed that Australian wages grew at the fastest annual pace in a decade last quarter, but was still short of market forecasts. The Australian dollar fell about 0.3% after the data, and was last 0.1% lower at $0.6849. The kiwi rose 0.39% to $0.6238, after earlier jumping roughly 0.5% to an intra-day high of $0.6248 immediately after the RBNZ’s cash rate decision.

World Markets

Reuters: Asian share markets followed Wall Street into the red on Wednesday as surprising strength in global surveys of services stoked fears that central banks would have to lift interest rates yet further and keep them up for longer. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.97%, after Wall Street posted its worst performance of the year on Tuesday, with an unexpectedly strong reading of S&P Global’s composite purchasing managers’ index (PMI) showing the U.S. economy was not cooling yet. “The flow of economic data surprises has continued overnight and this time it was a uniformly stronger than expected performance of the services sector across major developed market economies,” National Australia Bank analysts wrote in a client note. “It concerns the market that central banks will have to hike rates a lot more to curb inflation,” said Kerry Craig, JPMorgan Asset Management’s global market strategist.

New Zealand’s central bank raised interest rates by 50 basis points to a more than 14-year high of 4.75% on Wednesday. The central bank said it expected to keep tightening further to ensure inflation returned to its target range over the medium term. The Bank of Japan said on Wednesday it would conduct emergency bond buying, in a move to contain elevated yields, as the 10-year JGBs touched 0.505% for a second straight session, breaching the BOJ’s 0.5% cap and reaching the highest level since Jan. 18. Japan’s Nikkei share index fell 1.25% on Wednesday following a Tuesday PMI report showing the factory sector had contracted. China’s benchmark shed 0.68% and Hong Kong’s Hang Seng index dropped down 0.27%.

Australia’s S&P/ASX 200 index lost 0.25% in early trading, falling for a second straight session and touching its lowest in more than a month on expectations of interest rate rises. U.S. 10-year notes touched 3.966%, the highest since November, before easing to yield 3.9389% on Wednesday. The dollar index fell 0.077%, but analyst expect interest rate rises to lift the dollar, hurting emerging market equities, which benefited from a falling dollar. U.S. crude fell 0.5% to $75.98 per barrel and Brent was at $82.68, down 0.45%. Spot gold added 0.1% to reach $1,836.18 an ounce.

Published by the Mercury Team on 22 February 2023

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