Interest rates

Those South Africans in debt are set to face further pain in a fortnight with interest rates expected to be hiked. Photo by RODNAE Productions: on Pexels

South African rand stayed firm as dollar firms with Fed interest rates

The South African rand stayed firm against the dollar on Friday, as local budget and trade data failed to offer much relief to investors in Africa’s most industrialised economy.

Interest rates

Those South Africans in debt are set to face further pain in a fortnight with interest rates expected to be hiked. Photo by RODNAE Productions: on Pexels

Reuters: The South African rand stayed firm against the dollar on Friday, as local budget and trade data failed to offer much relief to investors in Africa’s most industrialised economy.

South African Rand stayed firm

At 1527 GMT, the rand traded at 18.2875 against the dollar, near its previous close of 18.2975. The dollar was last up about 0.05% against a basket of currencies. The March budget balance came in at a deficit of 46.15 billion rand while trade data showed a surplus of 6.89 billion rand. Analysts polled by Reuters predicted a budget deficit of 30 billion rand and a trade surplus of 25 billion rand. The country is being crippled by the worst rolling blackouts on record, contributing to bleak growth prospects.

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Last Thursday, South Africa celebrated Freedom Day, and with the Monday being another public holiday, many local traders were away from their desks until today. Shares on the Johannesburg Stock Exchange rose marginally, with the broader all-share index closing up 0.12% and the blue-chip Top-40 index ending 0.07% higher. The government’s benchmark 2030 bond was stronger, with the yield down 2.5 basis points to 10.180%.

British Pound

Reuters: Sterling on Friday climbed against the yen to its highest in almost six months after the Bank of Japan left its ultra-easy monetary policy unchanged, sparking a broad-based drop in the Japanese currency. The yen fell against major currencies from the dollar to the euro after the BOJ decision, even as it scrapped a pledge to keep interest rates low. Sterling rose 1.2% against the yen to as high as 169.47, its highest since early November 2022. “If you don’t get catalyst for yen appreciation, you get moves like you are seeing in sterling-yen,” said Stephen Gallo, global currency strategist at BMO Capital Markets. “It’s more of a yen story.” The pound fell 0.2% versus the dollar, meanwhile. Against a basket of currencies, the dollar was up 0.5%, but still was on track for a second straight monthly loss.

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Sterling rose 0.1% against the euro. Interest rate hikes in Europe just as U.S. rates near a peak have been supporting the pound and euro of late. Sterling hit a 10-month high of $1.2545 on 14 April. “Pressure does look to be building for a move higher later in the year, however,” ING analysts wrote. However, Britain was the only country in western Europe in March with double-digit inflation. Some market players see further pain ahead for the British economy unless the Bank of England brings inflation down and growth picks up. The BoE’s next rate setting meeting is on May 11.

US Dollar

Reuters: The U.S. dollar rose on Friday after data showed inflation grew in March, though at a slower pace, keeping the Federal Reserve still firmly on track to raise interest rates at next week’s monetary policy meeting. The yen, meanwhile, fell across the board, after the Bank of Japan said it would maintain ultra-low interest rates as expected, and unanimously decided to make no changes to its yield curve control policy. The Japanese currency plunged to its lowest since September 2008 against the euro, and its weakest level in seven weeks versus the dollar. The euro was last up 1.5% against the yen at 150. On the week, Europe’s single currency rose 1.8%. The dollar, on the other hand, last traded 1.7% higher at 136.235 yen , posting a weekly gain of 1.6%, its best weekly performance since late February. The dollar index, a measure of the greenback’s value against six major currencies, rose 0.2% to 101.65.

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Friday’s data showed the personal consumption expenditures price index edged 0.1% higher in March after rising 0.3% in February. In the 12 months through March, the PCE price index increased 4.2% after climbing 5.1% in February. Excluding the volatile food and energy components, the PCE price index inched up 0.3% after increasing at the same rate in February. The so-called core PCE price index gained 4.6% on a year-on-year basis in March after rising 4.7% in February. The Fed tracks the PCE price indexes for its 2% inflation target. “You probably need a much bigger slowing in the growth rate to get the Fed comfortable that it’s succeeded in its mission; it’s not there yet,” said Joseph Lavorgna, chief U.S. economist at SMBC Nikko Securities in New York. “It doesn’t change the outlook (for policymakers next week).”

Following the inflation data, the rate futures market has priced in a 90% chance of a 25 basis-point hike next week. A separate report on Friday showing the final University of Michigan consumer sentiment reading of 63.5 in April, up from a three-month low 62 in March, added to dollar gains. U.S. consumers’ one-year inflation outlook was 4.6 this month from 3.6 in March, further underpinned rate hike expectations, boosting the dollar as well. The euro, meanwhile, slipped 0.1% against the dollar to $1.1017. Economic data painted a mixed picture for growth and inflation across the euro zone, raising uncertainty around the size of the European Central Bank’s expected interest rate hike next week. Preliminary data showed gross domestic product in the euro zone expanded by 0.1% in the first quarter, below expectations in a Reuters poll for 0.2%.

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The single European currency had fallen much more earlier in the session, but trimmed losses as investors sold the yen against the euro. That spilled over to the euro/dollar cross. “We think the balance of probabilities is gradually shifting in the dollar’s favour,” wrote Jonathan Petersen, senior market economist at Capital Economics in a research note. “The ‘goldilocks’ regime of stronger activity data outside of the U.S. seems to be fading, and we anticipate the dollar benefiting from safe-haven demand once the global growth picture starts to deteriorate more substantially in coming months.”

Global Markets

Reuters: Asian shares wobbled in cautious trade on Tuesday, while the dollar was firm ahead of a series of data releases and central bank meetings that begins with the Reserve Bank of Australia later in the day. The overnight sale of First Republic Bank’s assets to JPMorgan Chase resolved the third U.S. bank failure in two months. Treasury yields rose in response and expectations firmed to near certain for one final U.S. rate hike this week. JPMorgan shares rose 2.1%. The S&P 500 closed flat and ANZ analysts said markets’ relief was evident. MSCI’s broadest index of Asia-Pacific shares outside Japan wriggled either side of flat, and was last down 0.2% after tech and casino gains in Hong Kong proved shortlived. Mainland China markets were closed. Japan’s Nikkei hit a 16-month high, before backing off slightly, with the bank sector a drag. Hundreds of thousands of Chinese visitors hit Macau’s casinos last weekend for the Labour Day holiday, and overnight MGM Resorts international reported better-than-expected revenues and called out strong volumes in Las Vegas and Macau.

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The yen, meanwhile, steadied after two sessions of heavy falls following the Bank of Japan’s decision on Friday to stick with ultra-easy monetary policy for the time being. The policy stands in contrast to the U.S. and Europe where central banks are deep into a hiking cycle and still going. The yen fell through its 200-day moving average on Tuesday and hit an almost two-month low on the dollar early on Wednesday before steadying at 137.40. The Japanese currency made a fresh 14-1/2 year trough at 151.08 per euro on Wednesday and is trading at its lowest recorded on the Swiss franc in Refinitiv data stretching back to the early 1980s. The euro held at $1.0987. Much of Europe also returns from May Day holidays on Tuesday, with final activity surveys due, preliminary inflation figures and a survey of European bank lending that will be closely watched given recent stresses in the sector.

European futures rose 0.1% in Asia, while S&P 500 futures fell 0.1%. On the monetary policy front the Reserve Bank of Australia is first up in a week that brings central bank meetings in the U.S., Europe and Norway. Markets are positioned for the RBA to stand pat and the others to hike. “(The Aussie dollar) can rise by 0.8% if the RBA lifts the cash rate by 25 bp as we expect, because financial markets are pricing almost no chance of a change,” said Kristina Clifton of the Commonwealth Bank of Australia in Sydney. Interest-rate futures trade implies a 95% chance of a 25 bp hike from the Federal Reserve on Wednesday, but markets are also pricing rate cuts by year’s end.

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Two-year Treasury yields, which track short-term U.S. rate expectations were steady at 4.1221% in Asia. U.S. credit default swaps – which reflect insurance against a default – are illiquid but have surged lately as political brinkmanship pushes the U.S. government near its borrowing limit. Overnight, Treasury Secretary Janet Yellen said the Treasury might run out of money to cover obligations as soon as June 1. “The next few weeks are going to be unpredictable,” Goldman Sachs analysts said in a note,” with uncertainty over the precise deadline not helping to focus lawmakers’ minds. “That could raise the risk that Congress does not lift the debt limit in time, which could result in missed payments but could also result in a short-term extension, in which case the exercise would repeat a few weeks or a few months later.”

Published by the Mercury Team on 2 May 2023

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