South African Rand weakened - Cup saying be strong

South African Rand weakened, Dollar on track for another loss. Photo by Heather Ford on Unsplash

South African Rand weakened, Dollar on track for another loss

The South African rand weakened on Friday, as rising expectations that the U.S. Federal Reserve will raise interest rates by 25 basis points in May lent support to the dollar.

South African Rand weakened - Cup saying be strong

South African Rand weakened, Dollar on track for another loss. Photo by Heather Ford on Unsplash

Reuters: The South African rand weakened on Friday, as rising expectations that the U.S. Federal Reserve will raise interest rates by 25 basis points in May lent support to the dollar. At 1513 GMT, the rand traded at 18.0800 against the dollar, down 0.33% from its previous close.

South African Rand weakened

The dollar was marginally firmer at 101.87 against a basket of global currencies, with money markets now pricing in a roughly 86% chance of 25 bp hike next month despite jobless claims this week pointing to a slowing U.S.labour market. 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.

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This 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. Shares on the Johannesburg Stock Exchange slipped, with both the broader all-share index and the blue-chip Top-40 index ending more than 1.2% lower. The government’s benchmark 2030 bond was weaker, with the yield up 5 basis point at 10.120%.

British Pound

Reuters: The pound fell on Friday after economic data showed British consumers are buckling under the pressure of inflation. British retail sales fell by a bigger-than-expected 0.9% in March compared to February, data showed on Friday, with high inflation and bad weather keeping consumers away from the shops. The pound fell 0.5% to $1.238 and was on track for a weekly loss of around 0.25%. It has slipped since hitting a 10-month high of $1.255 last Friday. Meanwhile the euro was up 0.34% against sterling at 88.47 pence. The euro zone’s currency received a boost after survey data showed that the bloc’s economy unexpectedly gathered pace in April.

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Survey data showed that Britain’s economy also fared well in April, although it was overshadowed by the retail figures. “As far as sterling is concerned, you’ve got high inflation, expectations of a higher peak in rates from the Bank of England and that has supported sterling, but you definitely have that downward pressure,” said Fiona Cincotta, market analyst at City Index. “What if the consumer can’t hold up? Those retail sales support that rather depressing outlook.”

Data last week showed that British inflation unexpectedly remained in double figures in March, at 10.1% year-on-year. As a result, traders expect more interest rate hikes from the Bank of England. Rates are now seen rising to around 4.9% by September, from 4.25% currently, according to pricing in derivatives markets. Yet the influence of higher rate expectations on the pound has been negligible this week, as economic concerns and dollar strength have weighed on the currency. The dollar index , which measures the currency against six others, was up 0.16% to 101.94 on Friday and on track for the first weekly gain since February.

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US Dollar

Reuters: The dollar began the last trading week of the month on a firmer footing, with traders awaiting a slew of central bank policy meetings that could signal how soon the steep increases in interest rates globally might come to an end. U.S. Federal Reserve policymakers are widely expected to raise rates by another 25 basis points at next week’s Federal Open Market Committee meeting, though the focus will be on the guidance for the future rate path. While recent economic data have pointed to slowing U.S. growth, parts of the economy continue to show resilience while inflation remains sticky, leaving traders debating the scale of rate cuts expected as early as July through to the end of the year.

The U.S. dollar rose broadly against most major currencies in Asia trade, with the euro and sterling slipping 0.07% to $1.0981 and 0.06% to $1.2437, respectively. The Aussie fell 0.29% to $0.6674. The U.S. dollar index rose 0.13% to 101.81, but was on course for a monthly loss of more than 0.7%, having fallen over 2% in March. Data released on Friday showed that U.S. and euro zone business activity gathered pace in April, reducing concerns about an impending recession in major economies. “The takeaway from the various PMIs is that the services sector both in Europe and the U.S. seems to be pretty resilient,” said Ray Attrill, head of FX strategy at National Australia Bank. “There’s nothing, as yet, to hang your hat on rate cuts in the second half of the year,” he added, noting inflation-related indicators would need to show more evidence of price pressures subsiding.

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Markets are expecting the European Central Bank, which also meets next week, to raise rates by a quarter point, with some chance of a 50bp hike. ECB President Christine Lagarde said last week that inflation in the euro zone remains too high and the ECB’s monetary policy “still has a bit of way to go” to bring back inflation towards its 2% goal. Elsewhere, the kiwi fell 0.15% to $0.6130. In Asia, the Bank of Japan’s policy meeting this week takes centre stage, as it marks the first meeting to be chaired by new BOJ Governor Kazuo Ueda. Ueda is widely expected to maintain the BOJ’s current ultra-easy policy at the meeting, having reassured markets since succeeding Haruhiko Kuroda early this month that any change in policy won’t happen quickly. “We still look for a removal of the YCC regime, an interest rate hike at some stage this year amid broadening inflationary pressures and upward pressure on wage growth in Japan,” said OCBC currency strategist Christopher Wong. The yen was last roughly 0.2% lower at 134.41 per U.S. dollar.

Global Markets

Reuters: Asian shares were mostly lower on Monday in a week packed with economic data and central bank meetings, along with earnings from the tech giants that have kept the S&P 500 afloat so far this year. Market action was sluggish in the wake of Friday’s surprisingly strong surveys of business activity which reinforced the case for higher interest rates. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.4%, while Japan’s Nikkei nudged up 0.2%. Chinese blue chips fell 0.4%. Over in Australia, there was some weakness in mining stocks after Chile moved to boost state control over its lithium industry, which has the world’s largest reserves of the battery metal. EUROSTOXX 50 futures and FTSE futures were both little changed. S&P 500 futures and Nasdaq futures eased 0.3% ahead of a busy week of earnings. Apple Inc and Microsoft Corp alone have accounted for nearly half of the S&P 500’s gains through March, so there is much riding on their outlooks.

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“We believe stalwarts Microsoft, Amazon and Google should all deliver cloud results that meet and likely exceed Street 1Q expectations this week despite recent noise in the market,” said analysts at Wedbush Securities. “We also believe a major narrative of tech earnings season will be the AI arms race and each Big Tech player updating investors on their own AI ambitions/monetization strategy as Redmond battles Google and other tech stalwarts for the AI trophy case.” The U.S. House of Representatives could this week vote on a Republican plan to raise the debt ceiling in exchange for spending cuts. Weak tax receipts mean the government could run out of money earlier than expected, and the risk of default has seen a rise in U.S. credit default swaps. Figures on U.S. wages and economic growth due this week will likely reinforce the case for further tightening. The Atlanta Fed’s influential GDP Now tracker has the U.S economy growing an annualised 2.5% in the first quarter, only a shade slower than the previous quarter.

Markets are pricing in an 86% chance the Federal Reserve will hike rates by a quarter point at its meeting in the first week of May, and fully expect a similar hike from the European Central Bank with some risk of a half-point move. Central banks in Canada and Sweden meet this week, but most attention will be on the Bank of Japan for the first meeting chaired by its new governor, Kazuo Ueda. Ueda on Monday said policy easing had to be continued since inflation was still under 2% in trend terms. Only three out of 27 economists polled by Reuters expect the BOJ to start to scale-back its yield curve control policy this soon, but there are reports the central bank is considering conducting a comprehensive review of the impact of its easing. “Media background suggests don’t expect tweaks to YCC, but its clear the writing is on the wall and the risk is of more substantive change at the next meeting,” said Tapas Strickland, head of market economics at NAB.

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In contrast, the head of Belgium’s central bank warned in an FT article on Monday that investors are underestimating how high eurozone borrowing costs will rise. The divergence in policy between Japan and the rest of the developed world has seen the yen weaken steadily in the last few weeks, with the euro in particular hitting a six-month high. The single currency was firm at 147.56 yen on Monday , while the dollar held at 134.35 . The euro held at $1.0980 , within sight of its recent one-year peak of $1.1075. A higher dollar and bond yields have been a burden for gold, which shed 1.2% last week and was last lying at $1,979 an ounce. Chicago wheat gained almost 1% after Russia threatened to terminate a grain deal allowing Ukrainian exports, raising concerns over world supplies. Oil prices also lost ground last week, though planned production cuts from OPEC offer some support. Brent eased 66 cents on Monday to $81.00 a barrel, while U.S. crude fell 67 cents to $77.20 per barrel.

Published by the Mercury Team on 24 April 2023

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