South African rand stays flat as power cuts continue

The South African rand stays flat and showed little changed on Tuesday as the country continued to struggle with rolling power outages.

South African rand stays flat

Reuters: The South African rand was little changed on Tuesday as the country continued to struggle with rolling power outages. At 1632 GMT, the rand traded at 17.4150 against the dollar, versus its previous close of 17.4100. “There is simply not much positive news domestically, which was bound to impact market sentiment at some point,” ETM Analytics said in a note. South Africa’s governing African National Congress wants to employ disaster management legislation that was used to respond to the COVID-19 pandemic to help end crippling power cuts, a top party official said on Tuesday.

Struggling state utility Eskom has implemented power cuts every day this year, after a record number of days with outages last year. On Tuesday, it will ramp up power cuts to the highest level on record. Data from the revenue service showed on Tuesday that South Africa’s trade surplus narrowed to 5.43 billion rand in December from a revised surplus of 7.30 billion rand in November. The country’s private sector credit expanded 7.73% year on year in December after rising by 8.30% in the prior month, according to central bank data. On the Johannesburg Stock Exchange, the All-share index lost more than 1% on Tuesday.

The government’s benchmark 2030 bond was slightly stronger, with the yield down 1.5 basis points to 9.675%.

British Pound

Reuters: Sterling slipped to a one week low against the U.S. dollar on Tuesday, ahead of the Bank of England’s expected 10th consecutive interest rate hike, and as the International Monetary Fund warned about Britain’s economic outlook. The Bank of England is expected to raise its interest rates by half a percentage point to 4% on Thursday in a week packed with central bank decisions, with the U.S. Federal Reserve and the European Central Bank expected to hike interest rates on Wednesday and Thursday, respectively. Adding to the downbeat sentiment, Britain was the only Group of Seven nation to suffer a cut to its 2023 economic growth outlook by the International Monetary Fund on Tuesday. The pound was down 0.3% to $1.2314 against the dollar at 1150 GMT, but was still on course for its fourth consecutive monthly gain, up 1.8% against the greenback in January.

It was slightly softer against the euro, down 0.1% at 87.94 pence, not too far from a one-month high against the single currency hit earlier this month. “The BoE meeting on Thursday is containing any large moves in sterling at the moment. But today’s data will certainly not have inspired much confidence in the outlook for the UK economy going forward, and I think this is weighing on the pound,” said Stuart Cole, head macro economist at Equiti Capital. Markets are currently placing a 84% chance of a 50 basis point rate hike at Thursday’s BoE meeting. ING strategists said they expected BoE’s decision to have a broadly neutral impact on the pound against the dollar. “Sterling/dollar moves may be mostly dictated by the FOMC reaction,” wrote ING analyst Francesco Pesole in a note, referring to the Federal Reserve’s rate decision.

Against the euro, ING expects sterling to hold below 88.00 pence until Thursday, “although inflation figures in the euro zone mean the balance of risk is tilted to the upside for the pair,” wrote Pesole. British grocery inflation hit a record 16.7% in the four weeks to Jan. 22, dealing another blow to consumers battling an escalating cost-of-living crisis, industry data showed on Tuesday. On a brighter note, a survey showed the British public’s predictions for inflation cooled again in January. The news is likely to provide comfort that high prices will not become permanently embedded in expectations as BoE policymakers mull how far to hike rates in the battle to bring down inflation. But concerns of a recession remain in focus, with numbers showing mortgage approvals slumped in December to levels seen during the global financial crisis, hinting that the housing market is slowing much faster than the consensus predicted.

US Dollar

Reuters: The dollar was broadly flat against major currencies on Wednesday after easing in the previous session following U.S. data that showed moderating wage pressure, with investors keenly awaiting the conclusion of a Federal Reserve policy meeting. The U.S. central bank is expected to raise interest rates by 25 basis points later on Wednesday, but Fed Chair Jerome Powell’s press conference is likely to take the spotlight as traders attempt to gauge how long the Fed is likely to stay hawkish. The dollar index, which measures the U.S. currency against six major peers, fell 0.029% to 102.060. It slipped 0.16% in the previous session, in part because of a report showing U.S. labour costs had increased in the fourth quarter at their slowest pace in a year.

The index has fallen for four straight months. As investors price in the Fed reaching the end of its rate-hike cycle, the index is far from the 20-year high of 114.78 it touched on Sept. 28. Investor attention this week will also be on the monetary path taken by European Central Bank and Bank of England, each of which is expected to raise interest rates by 50 basis points on Thursday. The euro was down 0.03% to $1.0859, while sterling was last trading at $1.231, down 0.08% on the day. The Japanese yen strengthened 0.10% versus the greenback at 129.98 per dollar. Prices of Fed funds futures imply the Fed’s benchmark rate will peak at 4.91% in June, up from 4.33%, then fall to 4.48% by December. “Recent progress on inflation has encouraged market participants to expect the Fed to quickly pivot from interest rate hikes to interest rate cuts,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.

Since signs of labour market loosening were limited, the Fed would likely pair a smaller rate hike this week with hawkish communication, she said. “The U.S. dollar can in turn enjoy a brief rally if markets reassess their expectations for a quick FOMC pivot.” The Fed increased interest rates by 50 basis points in December after four successive 75 bps rate hikes. It said then that interest rates might need to be higher for longer to tame inflation. “The expectations of a soft landing have picked up since the start of the year, relative to the rising recession bets seen in second half of last year,” Saxo Markets strategists said. “There is some reason to believe that Powell and team may be aiming to lengthen the hiking cycle in order to buy more time to assess both the incoming data and the impact of their previous aggressive rate hikes.”

Global Markets

Reuters: Asia’s stock markets steadied on Wednesday, with signs of a slowdown in U.S. wages bolstering hopes that the Federal Reserve could hint at an end to interest rate hikes at its meeting later in the day. Wall Street indexes had rallied, as had bonds to a lesser extent, while the dollar gave up gains overnight when the Fed’s preferred wages gauge, the U.S. employment cost index, showed a 1% rise last quarter, its smallest increase in a year. MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.6% by mid-session, following a 1.2% drop on Tuesday, while Japan’s Nikkei was flat. The Fed will announce its rate decision at 1900 GMT, followed by a news conference with Chair Jerome Powell half an hour later. Interest-rate markets have priced in a slowdown in the cracking pace of rate hikes, with Wednesday’s expected 25 basis point hike seen bringing the Fed funds rate target range to 4.5-4.75%.

Barring surprises, the focus will be on Powell’s tone. Investors will be trying to gauge whether and how hard he pushes back on market pricing for rate cuts beginning as soon as the second half of this year. “The market is anticipating some pushback from Powell, although it’s difficult to pin down how much is enough to convince the market,” said Brian Daingerfield, head of G10 currency strategy at NatWest Markets. “Anything short of Powell going 10 for 10 hawkish may ultimately be seen as being not hawkish enough. Conversely, the market may take even the smallest dovish concession and run with it.” Currency trade has been in a holding pattern ahead of the Fed and Bank of England and European Central Bank meetings that follow on Thursday. The dollar dropped for a fourth straight month in January, and lost 1.5% on the euro and 0.8% on the yen. Both pairs were steady in Asia, with the euro at $1.0865 and the dollar buying 130.14 yen.

The Australian dollar, which gained 3.5% through January, took a breather at $0.7072. U.S. treasuries were cautiously firmer in Asia, with benchmark 10-year yields down 2 bps to 3.5069%. S&P 500 futures fell 0.3%. Ahead of the Fed meeting, European inflation data is due with risks of an upside surprise after Spanish price rises came in hotter-than-expected earlier in the week. U.S. manufacturing data is also due, amid more signs of cracks in the global economy. Japan’s factory activity contracted for a third straight month in January, a private survey showed on Wednesday. South Korea posted a record monthly trade deficit for January due mainly to a far worse-than-expected drop in exports. Facebook owner Meta reports earnings later on Wednesday. Company executives had struck a cautious tone at earnings calls on Tuesday, as a slowdown looms.

Exxon posted a record $59 billion adjusted profit, though Caterpillar and McDonald’s shares fell as the companies warned of inflation squeezing profit margins. In commodity markets, optimism for demand supported oil prices and Brent crude futures were up 0.23% to $85.67 a barrel. Gold , which rallied on the dollar’s weakness through January, paused at $1,927 an ounce. Indian conglomerate Adani, meanwhile, remained under pressure, with Adani Enterprises shares down 3% and below the lower end of the offer price for a $2.5 billion stock sale that ended on Tuesday. Prices for dollar bonds in Adani Group companies were steadying in Asia trade on Wednesday after last week’s rout.

Published by the Mercury Team on 1 February 2023

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