South African rand strengthened despite lacklustre PMI

Reuters: The South African rand strengthened more than 1% against the dollar on Monday, despite an economic survey that showed business activity was at an almost two-year low. 

South African rand strengthened

At 1401 GMT, the rand traded at 19.2800 against the dollar, up about 1.2% from its closing level on Friday. The dollar was last trading around 0.1% stronger – at 104.030 – against a basket of global currencies. The rand was boosted by Chinese PMI data that showed manufacturing and services activity picking up, said DailyFX analyst Warren Venketas. China is South Africa’s largest trading partner, so positive news about the health of its economy tends to lift South African asset prices. “In addition, part of the rand strength is likely due to some profit taking as the pair has been in overbought territory for some time at extreme levels.” said Venketas in a note.

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The rand fell sharply last month as investor sentiment soured on the back of the worst rolling blackouts on record and U.S. allegations that South Africa had supplied arms to Russia late last year. It hit an all-time low last week at 19.9075 to the greenback. “South Africa’s geo-diplomatic risk has peaked, and foreign investors are starting to dip their toes back into South Africa, but a strong dollar reduces scope for rand gains,” said Rand Merchant Bank analysts in a research note.

The S&P Global South Africa Purchasing Managers Index released on Monday showed that private sector activity had contracted for a third consecutive month in May as rolling power cuts and inflationary pressures continued to weigh on businesses. Investors will turn their attention to today’s Statistics South Africa for the country’s first quarter gross domestic product figures. JP Morgan in May predicted a 0.2% decline in the country’s 2023 GDP. South Africa’s benchmark 2030 government bond was stronger, with the yield down 11 basis points at 11.140%.

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British Pound

Reuters: The pound slipped against the dollar and also lost ground against the euro on Monday, as the U.S. currency was supported by last week’s strong jobs data, while in Britain, business activity data underscored the continued stickiness of inflation. Sterling fell 0.5% to $1.2387 as the dollar was supported by traders’ increasing expectations of the chance of another U.S. rate hike, perhaps in July if the Fed chooses to ‘skip’ a rate increase at this month’s meeting. The U.S. data showed jobs growth in the world’s biggest economy accelerated in May, but a jump in the unemployment rate to a seven-month high of 3.7% suggested that labour market conditions were easing. “The headline story on the dollar is relatively straightforward at the moment. The US economy continues to surprise to the upside, while Europe and China have been weaker than expected. That has been and continues to be positive for the dollar in the near term,” said Goldman analysts in a weekend note.

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The pound also softened against the euro, which rose 0.35% to 86.31 pence. The euro last week dropped as low as 85.68 pence, its lowest against the British currency since December. Activity data released on Monday showed British services firms reported the strongest input cost pressures in three months in May and a steep increase in prices charged. Some investors argue that rate hikes could weigh on the pound due to their effect on British growth, though Barclays analysts in a note offered an alterative view. “Although further tightening will ultimately weigh on growth, the UK’s current inflation problem is a symptom of resilient demand amidst tight labour markets and reduced aggregate supply, in our view,” they said in the note. “As such, further tightening will enhance sterling’s carry advantage and afford some support to the pound.”

US Dollar

Reuters: The dollar languished well below last week’s 2-1/2-month highs on Tuesday after unexpectedly soft U.S. services data firmed up expectations for a rate pause at the Federal Reserve’s meeting next week but clouded the policy outlook for the months ahead. The Aussie hovered not far from last week’s high ahead of the Reserve Bank of Australia’s policy decision later in the day, with analysts and investors split over whether the central bank will hike or hold. Leading cryptocurrency bitcoin sagged toward the psychological $25,000 mark after U.S. regulators sued Binance, the world’s biggest cryptocurrency exchange. Global markets have been keenly focused on what the Fed might do at next week’s meeting and thereafter, with data and comments from central bank officials causing some volatility in the dollar.

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The U.S. dollar index – which measures the currency against six major peers – was flat at 104.00, after a shaky few days that saw it rally to a 2 1/2-month peak at 104.70 on the final day of May, only to get knocked back by suggestions by Fed officials that they would skip a rate hike in June. However, hot employment numbers on Friday saw bets for a July hike ramp up, while the overnight weak services sector outcome has yet again clouded the outlook for rates. The Federal Open Market Committee sets policy on June 14, and markets are now pricing in a 77% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool. “The soft ISM services PMI was unexpected to say the least,” said Tony Sycamore, a market analyst at IG Markets in Sydney. “Services have been a real pocket of resilience.”

With no major U.S. data for the remainder of the week and Fed officials in a “blackout” period, “it looks to me like the dollar is in a bit of a holding pattern ahead of the FOMC meeting,” Sycamore said. “That makes sense, because if you’ve got a position on here, you wouldn’t want to add to it.” The dollar was little changed at 139.55 yen, while the euro edged 0.08% higher to $1.0718. The Australian dollar was flat at $0.6617. It reached $0.66385 on Friday after a large hike to the minimum wage. The currency had dropped to the lowest since early November on the final day of May, undermined by soft economic data at home and in key trading partner China. “If you’re the RBA and you’re contemplating whether to pause or whether to tighten again, I think what we saw at the end of last week tips the balance firmly in favour of a rate hike,” said IG’s Sycamore, referring to the wage increase. “The market is still short the Aussie dollar,” he said. “If you see a hike today, the next stop will be 67 cents.”

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Money markets currently lay 35% odds on a quarter-point rate increase. Elsewhere, bitcoin attempted to find its feet around $25,370, after tumbling 5.1% overnight in its biggest drop since April 19. The Securities and Exchange Commission sued Binance and its CEO Changpeng Zhao on Monday for allegedly operating a “web of deception,” saying the exchange artificially inflated its trading volumes, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about its market surveillance controls.

Global Markets

Reuters: Asian stock markets edged lower on Tuesday as economic data showed U.S. services sector unexpectedly softened, reinforcing expectations that the Federal Reserve may skip an interest rate hike when it meets next week. MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.1% at 514.37. Tokyo’s Nikkei eased 0.22%, while Australia’s S&P/ASX 200 index lost 0.73% ahead of the Reserve Bank of Australia’s policy decision later in the day. China shares declined 0.15%, while Hong Kong’s Hang Seng Index was 0.07% lower. Data overnight showed that the U.S. services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for inputs to a three-year low, which could aid the Federal Reserve’s fight against inflation.

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The services industry accounts for more than two-thirds of the U.S. economy. “The index sends another signal that demand is cooling and that the cumulative tightening is working through the economy, giving room to the Fed to pause in June to assess conditions further,” said Saxo Markets strategists in a note to clients. A string of economic data along with last week’s dovish rhetoric from Fed officials have emboldened bets of the Fed refraining from an interest rate hike at its June 13-14 meeting. Data on Friday showed U.S. nonfarm payrolls rose by 339,000 jobs in May, but a surge in the unemployment rate to a seven-month high of 3.7% suggested an easing in labour market conditions.

Markets are now pricing in a 77% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool. “The tactical risk for equity investors in the very near term is that the Fed indeed skips a meeting and raises rates in July and not June,” said Gary Dugan, CIO of Dalma Capital. “The vibrancy of growth, the debt ceiling as an issue out of the way now, and a slow-moving Fed might just trigger a further rally in equities.” In oil markets, prices eased to give up most the gains from the previous session after the world’s top exporter, Saudi Arabia, said that it would further cut output. U.S. crude fell 0.25% to $71.97 per barrel and Brent was at $76.55, down 0.21% on the day.

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Saxo strategists said recession concerns, firmer signs of Fed rate cuts or China stimulus measures may be needed to turn sentiment on the energy markets. “Still, risks of a tighter market in second half remain with OPEC focused on ensuring market stability.” In the currency market, the dollar index, which measures greenback against six major peers, eased 0.01%. The yen weakened 0.04% to 139.62 per dollar, while Sterling was last fetching $1.2436, off 0.01% on the day. The Australian dollar eased 0.02% to $0.661 as traders wait for the policy decision from the country’s central bank. “We expect the RBA to leave the cash rate on hold,” analysts at Commonwealth Bank of Australia said in a note. But the decision to raise minimum wage by 5.75% from July 1 increases the risk the RBA hikes the cash rate by 25 basis points, the CBA analysts wrote. In cryptocurrencies, bitcoin was last at $25,657.98, having slid over 5% overnight after the U.S. securities regulator sued crypto exchange Binance, in another blow to the industry.

Published by the Mercury Team on 6 June 2023

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