Watch South African Rand extended its gains video

South African rand weakened 1% at start of data-filled week. Photo: Getty Images

South African rand weakened 1% at start of data-filled week

The South African rand weakened on Monday, kicking off a week of data releases which include the country’s second quarter gross domestic product and current account.

Watch South African Rand extended its gains video

South African rand weakened 1% at start of data-filled week. Photo: Getty Images

Reuters: The South African rand weakened on Monday, kicking off a week of data releases which include the country’s second quarter gross domestic product and current account.

South African Rand weakened

At 1500 GMT, the rand traded at 19.05 against the dollar, more than 1% weaker than its previous close. “The rand is giving back last Friday’s gains against the USD with the U.S. and Canadian markets observing Labor Day,” said DailyFX analyst Warren Venketas in a research note.

The rand is being negatively influenced by worsening power cuts, Venketas added. On Thursday, the South African Reserve Bank will release the country’s second quarter current account and GDP data. “The economy held up better than expected in Q2, as load-shedding was less severe than in Q1,” said Nedbank’s Group Economic Unit in a research note, referring to the country’s rolling blackouts.

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Nedbank said it is predicting quarter-on-quarter GDP growth of 0.4%, but resilience is likely to fade as the national utility Eskom ramps up maintenance in the southern hemisphere’s summer months. On the stock market, the Top-40 and the broader all-share indexes rose around 0.8%. South Africa’s benchmark 2030 government bond was weaker in afternoon trade, with the yield up 3.5 basis points to 10.335%.

U.S Dolalr

Reuters: The dollar was firm on Tuesday and the Aussie under a little pressure as traders watched out for the Reserve Bank of Australia’s interest rate decision with bets that rates may have peaked. The Aussie was 0.5% lower at $0.6431 in early trade. Softer than expected inflation data for July has markets all but certain the cash rate will stay on hold at 4.1% when the RBA announces its decision in the next few hours, far lower than where U.S. overnight rates are at about 5.25-5.5%. The meeting is Governor Philip Lowe’s last before Michelle Bullock takes over, and focus will be on what can be gleaned from the outlook. Australia cut its wheat export forecast on Tuesday, though current account data showed that for the second quarter volumes for all exports helped to boost the economy.

Currency markets had been steady overnight, with volumes lightened by a U.S. holiday and with little economic data to gauge whether global hiking cycles might also be at an end. The euro drifted higher from recent lows and was steady at $1.0793 early in the Asia session. U.S. Treasuries opened lower in Asia, after the cash market was closed on Monday, with 10-year yields up 3 basis points to 4.20%. The yen dipped overnight and analysts see it grinding toward 150 per dollar unless there is a sharp change in the gap between Japanese yields, pegged near zero, and U.S. yields comfortably above 4%. A dollar last bought 146.55 yen.

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A Japanese government bond auction on Tuesday has the potential to shift things, if it goes awry and yields jump – though a slump in household spending could keep a lid on rates. “I do believe that 150 probably will be defended again and the Ministry of Finance really probably wants to implant that in the market players,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank, referring to government FX intervention.

Elsewhere the focus is on where the data is guiding interest rates in the west and whether a drip feed of stimulatory measures in China point to Beijing stepping up economic support. Relaxations on home-purchase restrictions are expected, and China has been cutting interest rates while stepping in to shore up the currency. The yuan held at 7.2825 on Tuesday.

PMI data is due later in the session, as are European producer prices – though they tend not to deviate much from previously released estimates – and U.S. factory orders. “The big thing is how the data pulse in each country plays out, which will inform whether these tightening cycles are definitely done – or maybe not,” said Imre Speizer, strategist at Westpac in Auckland. “It’s a waiting game.” Sterling hovered at $1.2624. The New Zealand dollar slipped 0.2% to a one-week low of $0.5926.

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British Pound

Reuters: The pound rose on Monday, but remained in sight of August’s two-month lows, as traders continued to weigh up the outlook for sterling, which analysts think could be at risk for more weakness over the course of this month. Data on Friday showed the U.S. economy generated more jobs than expected in August, but offered evidence that the labour market is starting to show signs of slowing, which dented the dollar and helped the pound post its best weekly performance in more than a month. Sterling was last up 0.3% at $1.26265 on Monday.

It is still showing a gain of 4.4% for the year so far, neck and neck with the Swiss franc for the title of best-performing major currency against the dollar. But it’s far cry for the year-to-date gain of 8.6% that it showed just over two months ago. Money markets show traders believe the Bank of England has at least one, if not two, more rate hikes in the pipeline. The chances of a quarter-point rise when the BoE meets on Sept. 21 are nearly 90%, with another rate hike almost guaranteed in November too.

That is in sharp contrast to the U.S. market, where traders believe the Federal Reserve is unlikely to raise rates again for the foreseeable future, or the euro zone, where investors think there’s a 50/50 chance of a lone rate rise by the end of 2023. Part of sterling’s appeal this year has been the prospect of higher interest rates. If the BoE does raise rates twice more, Britain will have the highest interest rates across the G10 – something that has not happened in at least 40 years.

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Revised official data on Friday showed the UK economy surpassed its pre-COVID-19 size in the final quarter of 2021, a much earlier recovery from the pandemic than previously estimated and ahead of other big European countries. That said, analysts believe two more hikes might be overkill and the BoE is more likely to deliver just one more. Investors are starting to prepare for this eventuality too. Data on Friday showed that, in the week to Aug. 29, speculators cut their long position in sterling by almost a fifth. Their bullish bet on the pound is still close to its largest since mid-2014.

“We do still, however, believe that the market prices about 20bp too much into the BoE tightening cycle and that sterling can soften a little in the fourth quarter,” ING strategist Chris Turner said. This week, the data calendar is fairly light, with just final business activity surveys for August, a measure of consumer spending and another housing-market index, leaving sterling with few immediately potentially positive catalysts. “We need to push back through the $1.2800 area to diminish downside risk and a move towards $1.2400,” CMC Markets strategist Michael Hewson said.

Global Markets

Reuters: Asian equities fell on Tuesday as the spotlight remained on China and its efforts to stabilise its stuttering post-pandemic economy, while traders awaited the outcome of a policy meeting of the Reserve Bank of Australia. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.75% lower at 511.14, moving away from 515.37, the highest level since Aug. 11 it touched on Monday. China shares clocked their best day in over a month on Monday on the back of fresh measures to help boost the faltering economy. On Tuesday, China’s blue-chip CSI 300 Index fell 0.40%, while Hong Kong’s Hang Seng Index slipped 0.88%, giving back some of the gains.

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A private-sector survey showed on Tuesday China’s services activity expanded at the slowest pace in eight months in August as weak demand continued to dog the world’s second-largest economy and stimulus failed to meaningfully revive consumption. “The miss in China’s Caixin services PMI has offset some of the sentiment shift we got yesterday,” said Charu Chanana, market strategist at Saxo in Singapore. Investors are hoping that the drip feed of policy stimulus from Beijing will be enough to stabilise the Chinese economy.

“To be fair, China’s measures so far are a mere relaxation of over-regulation that can merely stop or slow down further damage, and not particularly stimulus actions that can reverse the damage,” Chanana said. “The hustle between weak high-frequency data and policy actions is likely to continue.” Investor focus will also be on China’s largest private property developer, Country Garden. The company faces a deadline for making interest payments on two U.S. dollar bonds on Tuesday, days after dodging an onshore debt default with a last-minute payment extension deal.

Australia’s S&P/ASX 200 index fell 0.62% ahead of the policy decision from the country’s central bank. The RBA is expected to stand pat on interest rates, according to a Reuters poll of economists. With the recent decline in inflation and a slight rise in unemployment in Australia, all but two of 36 economists polled by Reuters said the RBA would hold its official cash rate at 4.10%, in line with interest rate futures pricing.

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Economists though largely expect a final hike before the end of the year. “While the chances of another and almost certainly final rate hike have diminished, we aren’t totally ruling out one more before the year-end,” ING economists said in a note. The Australian dollar fell 0.11% to $0.645. The U.S. markets were closed on Monday, leading to light trading volume. While the economic calendar in the region is bare, several Federal Reserve officials are due to speak during the week.

Data on Friday showed U.S. job growth picked up in August, but the unemployment rate jumped to 3.8%, while wage gains moderated. The slight cracks in the labour market further bolstered expectations that the Fed is likely done hiking rates. Markets are pricing in 93% chance of the Fed keeping rates unchanged later this month, CME FedWatch tool showed, and has priced in about 60% chance of no more hikes this year.

European Central Bank President Christine Lagarde said central banks must pin inflation expectations at their targets at a time when changes in the labour and energy markets as well as geopolitical turmoil cause some price swings. “It will be critical for central banks to keep inflation expectations firmly anchored while these relative price changes play out,” Lagarde told an event in London on Monday.

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The market is now leaning against a hike at its September meeting after a run of soft data. In the currency market, the dollar index, which measures the U.S. currency against six rivals, fell 0.019%, with the euro down 0.03% to $1.0791. The Japanese yen weakened 0.03% to 146.53 per dollar, still at the levels that led to intervention from Japanese authorities last year. In commodities, U.S. crude rose 0.41% to $85.90 per barrel and Brent was at $88.95, down 0.06% on the day.

Published by the Mercury Team on 5 September 2023

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