South African Rand was weaker as Fed rate bets support Dollar

Reuters: The South African rand was weaker in early trade on Friday, as rising expectations that the U.S. Federal Reserve will raise interest rates by 25 basis points (bps) in May lent support to the dollar.

South African Rand was weaker on Friday

At 06:20 GMT, the rand traded at 18.0850 against the dollar, down more than 0.3% on than its previous close. The dollar was marginally firmer against a basket of global currencies, with money markets now pricing in a roughly 86% chance of 25 bps hike next month despite jobless claims this week pointing to a slowing labour market.

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The risk-sensitive rand often takes its cue from global factors like the outlook for U.S. monetary policy in the absence of major local drivers. No major domestic economic data is due to be released on Friday, although weekly inflation-linked bond and Treasury bill auctions are scheduled. Next week Statistics South Africa will publish the March producer price index, and the central bank will release its February leading business cycle indicator and biannual Monetary Policy Review.

The government’s benchmark 2030 bond was little changed in early deals, with the yield up 1 basis point at 10.080%.

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British Pound

Reuters: The pound retreated on Thursday after data showed British inflation is proving far more persistent than expected and is far higher than anywhere else in Western Europe, underscoring the threat to an already fragile economy. Headline inflation fell to 10.1% in March from February’s 10.4%, but it was well above expectations for a fall to 9.8%, data showed on Wednesday. More worryingly, the details in the report from the Office for National Statistics showed price pressures are everywhere and cannot be easily explained away by the sharp rise in the cost of energy over the last couple of years. The pound was last flat against the dollar at $1.244, and down 0.1% against the euro at 88.19 pence. Sterling is the second-best performing currency in the G10 against the dollar so far this year, with a gain of 2.67%, just behind the Swiss franc, which has gained 3% in that time.

The prospect of the Bank of England having to raise rates more than previously expected has partly driven flows into sterling, but that boost might not last much longer, given the impact of high prices on households and businesses. “The type of inflation the UK has now — linked to an energy crisis, labour shortages, and a term of trade shock — is never good for a currency. It’s an erosion of internal purchasing power. Simply look at real wage growth,” Stephen Gallo, who is global currency strategist at BMO Capital Markets. Real wages in Britain, earnings adjusted for inflation, showed one of the biggest drops on record in the three months to February, with a fall of 4.1% year on year. Grocery inflation is running at a record 17.5%, according to industry data, with staples such as milk, cheese and eggs rising the fastest.

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Money markets show traders believe the BoE will raise rates to a peak of about 5% by November this year, from 4.25% right now. A month ago, that expectation was for a peak at 4.00%. “You probably don’t want to be buying sterling if core inflation remains stubborn above 5% after three more 25 bps rate hikes from the BoE, which is currently priced into (overnight index swaps),” Gallo said. “Flip side, if the Q2 data reveal a meaningful drop in price pressures, there is probably a stronger case for sterling to avoid an isolated decline. My base case is the second scenario, but I am more worried about the first,” he said.

US Dollar

Reuters: The dollar was eyeing its first weekly gain in more than a month on Friday as bets for another rate hike by the U.S. Federal Reserve in May firm, though its gains were capped by soft economic data pointing to a slowing economy. In Asia, Japan’s consumer inflation held steady above the central bank’s target in March, with a key index hitting a four-decade high, putting pressure on the Bank of Japan (BOJ) to shift away from its ultra-loose monetary policy stance. The dollar slipped against the Japanese yen in early Asia trade, though it rose against most major currencies, with the U.S. dollar index edging 0.06% higher to 101.84. The index, which measures the greenback against six major peers, was on track for a weekly gain of more than 0.2% after five straight weeks of losses. Rising expectations that the Fed will raise interest rates by 25 basis points in May have lent some support to the greenback. Money markets are now pricing in an 84.5% chance of such a hike next month, as compared to a 67% chance a week ago, according to the CME FedWatch tool.

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Against the dollar, the euro slipped 0.03% to $1.0967, while sterling fell 0.09% to $1.24325. However, the greenback’s gains were capped after U.S. data released on Thursday added to growing recession fears. The number of Americans filing new claims for unemployment benefits increased moderately last week, suggesting the labour market was gradually slowing. A separate report from the Philadelphia Fed showed its measure of factory activity in the mid-Atlantic region plunging to the lowest level in nearly three years in April. “The U.S. economy is heading to recession,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (CBA). “We think (it will) be in recession probably around the middle of the year. “But the problem for the Fed is that inflation is still sticky at a higher rate, so we still think the Fed is going to increase interest rates at least once more.” Japan’s economy was also exhibiting signs of broadening price pressures, with data out on Friday showing its core consumer price index rising 3.1% in March from a year earlier, while an index excluding fuel costs rose at the fastest annual pace in four decades.

The dollar was last 0.07% lower against the yen at 134.13. Friday’s data may keep alive market expectations that the BOJ could phase out its massive stimulus programme later this year, with all eyes now on next week’s BOJ policy meeting, the first to be chaired by new central bank Governor Kazuo Ueda. “I don’t think Ueda is going to change policy at his first meeting next week,” said CBA’s Capurso. “But there’s been a few hints about a policy review, so that suggests to me that they’ll move in the next few months.” In other currencies, the Aussie was last 0.07% lower at $0.6738, while the kiwi fell 0.12% to $0.61705. Data out on Thursday showed that New Zealand’s consumer price inflation was lower than expectations in the first quarter, though it remained near historic highs.

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Wednesday data showed British consumer price inflation eased less than expected in March to 10.1% from February’s 10.4%, meaning Britain has western Europe’s highest rate of consumer inflation. “It looks like UK’s 10%+ CPI reading was the culprit. This has revived worries that interest rates will remain high for longer in the UK – and Europe,” said Fawad Razaqzada, market analyst at City Index. Deutsche Bank on Wednesday revised up expectations for British rates to include two more 25 basis point rate hikes from the Bank of England. Morgan Stanley now predict one, with a risk of a second.

Global Markets

Reuters: Asian stocks slid toward their worst week in a month-and-a-half on Friday and oil nursed losses, while bonds enjoyed their best bid in weeks as U.S. data and earnings showed signs of weakness. Overnight figures showed more Americans filing claims for jobless benefits and manufacturing activity in the mid-Atlantic region slumping to its lowest level in nearly three years. On the heels of other signals that the world’s biggest economy is slowing down, the data helped drag Brent crude futures, a bellwether for global activity, down 2.4% for their steepest single-day drop in five weeks. U.S. Treasuries rallied, with two-year yields down more than 9 basis points overnight as investors turned for safety and bet the U.S. hiking cycle is all but over. Early in the Asia day MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.3% lower and down 1% for the week so far, its worst performance since bank stability worries gripped markets in the middle of March.

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“The trend higher in jobless claims clearly shows a slowing in the labour market and plays to views of a U.S. recession in 2023,” said National Australia Bank’s head of market economics, Tapas Strickland. The U.S. Leading Economic Index, a gauge of future economic activity, also dropped to its lowest level since November 2020 overnight and it is signalling a recession starting mid-2023. The S&P 500 fell overnight, too, with some heavy selling on weak results. Tesla shares tumbled 9.7% after the electric vehicle maker posted its lowest quarterly gross margin in two years. AT&T shares dropped 10.4% after the wireless carrier missed revenue and cash flow estimates. The slowdown signals have also weighed on the U.S. dollar as traders bet on some 50 bps in U.S. rate cuts this year. Moves were slight in Asia trade, but the euro is lingering near last week’s one-year high at $1.0971. The yen hovered at 134.11 to the dollar, though the New Zealand dollar nursed losses at $0.6162 after Thursday’s softer-than-expected inflation data.

The Japanese market was a notable outlier in the region, with the Nikkei touching an eight-month high and on track for a second consecutive weekly gain. Corporate governance in Japan has suddenly become a cause celebre, and seems to be rousing the world’s third-largest stock market out of decades of lethargy. “The value trade has been working,” said Puneet Singh, director of quantitative research at Societe Generale in Singapore. “If you’re buying value in Japan, if I’m looking at (price-to-earnings) and just buy the cheap P/E names, that’s it, you’ve outperformed the market.” Japan’s consumer inflation held steady above the central bank’s target in March, data showed on Friday, keeping alive market bets that the Bank of Japan could phase out its policy of enormous bond buying to pin down government bond yields. Yields in Japan were broadly steady on Friday, eschewing the lead from the U.S. overnight. The BOJ meets next week. “It looks like market participants have taken positions in preparation for policy changes ahead of the meeting,” said Nomura strategist Naka Matsuzawa, though he expects no change.

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“We think that changes at the June meeting are now more likely, as long as financial unrest in the U.S. and Europe does not flare up again.” Elsewhere the mood dragged on bitcoin, which is back below $30,000, while the fall in yields has gold, which pays no income, supported at $2,002 an ounce. In commodity markets traders are closely watching for producers’ and buyers response to Chilean plans to nationalise the lithium industry. Chile holds the worlds largest reserves. In the oil market, at $80.79 a barrel, Brent is also below its 50-day moving average for the first time since oil producers unexpectedly announced extra production cuts two weeks ago.

Published by the Mercury Team on 21 April 2023

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