South Africa's rand slipped

South Africa’s rand slipped: Asian stocks follow Wall Street higher. Image by Wirestock on Freepik

South Africa’s rand slipped: Asian stocks follow Wall Street higher

South Africa’s rand slipped against the dollar on Wednesday as a drop in domestic inflation did little to prop up the currency ahead of an interest rate decision by the U.S. Federal Reserve.

South Africa's rand slipped

South Africa’s rand slipped: Asian stocks follow Wall Street higher. Image by Wirestock on Freepik

Reuters: South Africa’s rand slipped against the dollar on Wednesday as a drop in domestic inflation did little to prop up the currency ahead of an interest rate decision by the U.S. Federal Reserve.

South Africa’s rand slipped

By 1512 GMT, the rand was trading at 19.0350 against the dollar, about 0.5% weaker than its previous close. Headline consumer inflation fell to 5.5% year-on-year in November from 5.9% in October, data from the statistics agency showed, a slightly bigger fall than the 5.6% predicted by analysts polled by Reuters.

Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said inflation was expected to hover around its current rates until the middle of next year. “While officials at the Reserve Bank will take comfort from the fact that headline inflation has moved well below the upper bound of their target range, the fresh rise in core inflation means that they will probably stick to their hawkish rhetoric early next year,” he said. The South African Reserve Bank targets inflation between 3% and 6%.

The focus of global markets is on an interest rate decision by the Fed due at 1900 GMT and its policy outlook. On the stock market, the benchmark Top-40 index closed about 0.1% higher. South Africa’s benchmark 2030 government bond was stronger, with the yield down 2 basis points at 10.060%.

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U.S. Dollar

Reuters: The dollar was under pressure on Thursday after the Federal Reserve’s latest economic projections indicated that the interest-rate hike cycle has come to an end and lower borrowing costs are coming in 2024. Both the euro and Japanese yen jumped in response, with the European Central Bank preparing to announce its policy decision later on Thursday and the Bank of Japan coming up next week. Fed Chair Jerome Powell said at Wednesday’s Federal Open Market Committee meeting that the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view.” Policymakers were nearly unanimous in their projections that borrowing costs would fall in 2024. “This is a huge development for markets as we head into the new year and provides much-needed clarity. And clarity in this instance meant risk-on,” said Matt Simpson, senior market analyst at City Index.

The news from the FOMC meeting will likely overshadow upcoming economic data before personal consumer expenditures data is published next week, leaving room for “further downside potential for the US dollar,” he added. The U.S. dollar index , which measures the greenback against a basket of currencies, was last 102.87 after dipping as low as 102.77 overnight. Markets are now pricing in around a 75% chance of a rate cut in March, according to CME FedWatch tool, compared with 54% a week earlier.

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While recent economic releases have strengthened expectations that the Fed can achieve a soft landing for the U.S. economy, Powell kept open the option to act again if needed, noting that “the economy has surprised forecasters.” Market focus now shifts to a parade of central bank decisions, including the ECB and the Bank of England, Norges Bank and Swiss National Bank. With the ECB expected to hold rates steady, there will be more focus on forecasts for GDP and inflation, “and whether and how convincingly ECB President Christine Lagarde pushes back on pricing for cuts, with 100 basis points priced by September,” National Australia Bank Senior Economist Taylor Nugent wrote in a note.

The euro was mostly flat at $1.0882 after surging on Wednesday. Sterling was last trading at $1.2623. The Norwegian central bank is considered to be the only bank that could potentially raise rates. There is also a risk the SNB could dial back its support for the Swiss franc in currency markets. Elsewhere, the yen sat significantly higher around 142.80 yen per dollar following the greenback’s overnight tumble.

Expectations that the Bank of Japan could end negative interest rates at its monetary policy meeting on Dec. 18-19 caused the Japanese currency to jump last week, but those hopes have largely died down after Bloomberg reported on Monday that BOJ officials see little need to rush. Pressure will be on BOJ Governor Kazuo Ueda next week when he’s expected to keep alive prospects of an exit while dampening anticipation of an imminent move. In cryptocurrencies, bitcoin was up at $42,904.

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Global Markets

Reuters: Asian stocks broadly rallied on Thursday, after the U.S. Federal Reserve flagged the end of its tightening cycle and struck a dovish tone for the year ahead. U.S. Treasury yields slid to a fresh four-month trough, while the dollar continued to slide. MSCI’s broadest index of Asia-Pacific shares outside Japan shot up 1.8%, its biggest one-day percentage jump in a month. Mainland Chinese blue chips edged up by 0.2%, while Hong Kong’s benchmark advanced 1.2%. Australian shares were up 1.6%. However, Japan’s Nikkei slid 0.7%, weighed down by the yen’s sharp rally.

The Fed left interest rates unchanged on Wednesday and U.S. central bank chief Jerome Powell said its historic tightening of monetary policy is likely over with inflation falling faster than expected. A near-unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024 than it is now – with the median projection showing the rate falling three-quarters of a percentage point from the current 5.25%-5.50% range. U.S. fed funds futures boosted the chances of rate cuts starting as soon as in March after the Fed decision, according to LSEG’s FedWatch. The market has priced in more than 150 bps of easing next year.

“It was a very aggressive pivot,” said Ben Luk, global macro strategist at State Street Asia Limited. “The Fed has followed market expectation in terms of allowing for one more rate cut to be added into both the 2024 and the 2025 outlooks,” he said. That aggressive pivot will have a mixed impact in Asia, with tech shares to benefit more while markets including Japan will have a dampening effect as its currency strengthens with a weakening U.S. dollar, he added. “Overall, the meeting was a bit more dovish than we expected,” said Christian Scherrmann, U.S. economist at DWS.

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“However, we would like to remind that they are not yet on autopilot to the runway and that the timing of the first rate cuts still depends on the evolution of the incoming data and, in particular, of inflation,” he added. It is a busy week for central banks, with the European Central Bank, Bank of England and Swiss National Bank all announcing policy decisions on Thursday. The Bank of Japan’s turn comes on Tuesday. U.S. stocks surged to a sharply higher close on Wednesday and benchmark Treasury yields slid to their lowest level since Aug. 10.

U.S. stock futures, the S&P 500 e-minis, were up 0.4% on Thursday, while the 10-year Treasury yield pushed down further to as low as 3.9845%, breaking below the psychological 4% mark. The U.S. dollar index , which measures the greenback against a basket of currencies, fell a further 0.25% to 102.62. The euro gained 0.2% to $1.0899. The yen sat significantly higher, with the dollar sliding 0.7% to 141.82 yen. Spot gold was up 0.23% at $2,030.99 per ounce, after rising 2.4% on Wednesday. Oil prices rose, extending gains from the previous session. Brent futures rose 23 cents, or 0.31%, settling at $74.49 a barrel by 0345 GMT. U.S. West Texas Intermediate crude rose 11 cents, or 0.16%, and settled at $69.58 a barrel.

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British Pound

Reuters: The pound struggled for direction on Tuesday after data showed U.S. inflation slowed slightly in November and that British wage growth cooled in October. Sterling was last up 0.07% at $1.2563, having traded at around that level for most of the day. The euro was last up 0.22% at 85.93 pence. U.S. consumer prices rose 3.1% in the year to the end of November, data showed on Tuesday, down slightly from a 3.2% rate in October. Month-on-month, prices rose 0.1%. Currencies bounced around but ended up broadly where they were before the release, with the data almost completely in line with analyst expectations.

The pound fell slightly in the morning session in Europe after data showed that British earnings excluding bonuses were 7.3% higher than a year earlier in the three months to October, down from 7.8% in September. Economists expected a fall to 7.4%. The Bank of England sets interest rates on Thursday and the data opened up “the risk that some of the three hawks who voted for a hike in November switch to favouring a hold now,” said Chris Turner, global head of markets at lender ING.

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Economists and traders think the bank will almost certainly hold interest rates at 5.25%. But they will be listening closely for hints about when borrowing costs might start to fall. The Federal Reserve is due to set interest rates on Wednesday, before the European Central Bank on Thursday. Both institutions are also expected to hold rates steady. Sterling touched a three-month high of $1.2733 per dollar at the end of November as U.S. bond yields fell sharply on hopes the Fed will start cutting rates early next year. The euro fell to a three-month low against the pound on Monday at 85.5 pence.

Market players think the BoE is likely to hold rates a little longer than both the Fed and the ECB, raising the appeal of sterling. Yet Ashley Webb, UK economist at Capital Economics, said Tuesday’s wage data would likely boost bets that the BoE may cut rates “as soon as the middle of next year”. He said the data “leaves our forecast for rate cuts to start late in 2024 looking a bit more challenging”. The dollar index , which tracks the greenback against six peers, was last down 0.14% at 103.92.

Published by the Mercury Team on 14 December 2023

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