Reuters: The South African rand extends losses on Friday, capping off a week of losses after hawkish comments from Federal Reserve Chair Jerome Powell helped the dollar rally and decreased risk appetite.
South African Rand extends losses
Reuters: The South African rand fell on Friday, capping off a week of losses after hawkish comments from Federal Reserve Chair Jerome Powell helped the dollar rally and decreased risk appetite. At 1434 GMT, the rand traded at 18.7450 to the dollar, about 0.4% weaker than its previous close. The dollar last traded down about 0.06% against a basket of global currencies, but was still set for a strong weekly gain. The rand had jumped last week as risk sentiment improved after the Federal Reserve left interest rates unchanged.
On Thursday, Fed Chair Jerome Powell said that further interest rate hikes may be needed to bring inflation within the U.S. central bank’s target range. “Emerging market currencies have all given back a large part of recent gains as the rate hike fears and fresh global growth concerns dampen risk appetite,” said Andre Cilliers, Currency Strategist at TreasuryONE. “Fresh data releases over the next few weeks will be critical to what the Fed will likely do at its next FOMC meeting,” he added.
Like other risk-sensitive currencies, the rand often takes cues from global factors, such as U.S. monetary policy, in the absence of local drivers. On the Johannesburg Stock Exchange, the blue-chip Top-40 index was down about 1.4%. South Africa’s benchmark 2030 government bond was weaker, with the yield up 5 basis points to 10.390%.
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U.S. Dollar
Reuters: The dollar was steady on Monday as traders awaited another batch of inflation data from the United States that is expected to offer further clues this week on whether the Federal Reserve has more work to do to tame price pressures. The Japanese yen remained vulnerable, hovering not far from a one-year low against the greenback as markets remained on watch for possible intervention by Tokyo. The focus for most traders will be firmly on U.S. consumer price index numbers due on Tuesday after the Fed’s policy meeting this month tempered its hawkish stance although Fed Chair Jerome Powell last week hinted that the battle against inflation may not be over yet.
Retail sales the following day will also provide more information on the state of demand in the U.S. economy, which has shown signs of resilience in the face of high borrowing cost. “We expect the USD to remain on a strong footing,” Lenny Jin, Global FX Strategist at HSBC, wrote in a note, citing the U.S. economy’s continued growth outperformance as one crucial factor. HSBC expects October U.S. core CPI to remain unchanged compared to last month, “while further disinflation signals may only come in February 2024,” said Jin.
Elsewhere, market reaction was muted to news announced shortly before foreign exchange trading closed in New York on Friday that Moody’s lowered its outlook for the U.S. credit rating to “negative”. The dollar index, which measures the dollar against a basket of currencies, was last mostly flat at 105.80. There was little relief for the yen, however, which has come under pressure from rising U.S. Treasury yields and continued dollar strength. The Japanese currency was trading around 151.58 yen against the dollar on Monday, just under a one-year low of 151.74 hit at the end of October.
A hot number from one of the U.S. economic data releases this week “would certainly do the trick” in pushing dollar/yen to 152, said Tony Sycamore, a market analyst at IG. “Alternatively, a continuation of the more supportive risk backdrop would likely entice carry buyers to add to positions and test the measure of the Bank of Japan.” Elsewhere, sterling stood at $1.2228 to the dollar, firm ahead of UK average weekly earnings data on Tuesday and a CPI reading on Wednesday.
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British Pound
Reuters: Sterling held at around a one-week low against the dollar on Friday, set for a weekly decline of 1.2%, as markets digested data showing Britain’s economy failed to grow in the third quarter, though this was slightly above expectations. The pound was last up a fraction on the day at $1.2231 little changed compared to before the GDP data was released. Those numbers showed a 0% change in gross domestic product in the July-September period compared with a forecast for a 0.1% fall in a Reuters poll of economists, which many analysts said would likely represent the start of a recession. “The scale of outperformance is unlikely to prompt much change in market pricing for the interest rate outlook” MUFG analysts said in a morning note. “The market likely to consolidate into next week when we have the key CPI data.”
Changes in expectations of when and how quickly different central bank start cutting interest rates next year is a major consideration for currency markets at present. Markets are currently pricing in around 40 basis points of Bank of England rate cuts by September, less than for the U.S. Federal Reserve or the European Central Bank. BoE chief economist Huw Pill drew attention on Monday by saying that pricing which currently points to a first rate cut to Bank Rate in August 2024 – “doesn’t seem totally unreasonable, at least to me.”
Those comments – unusual as most central bank policy makers are avoiding talking about rate cuts – contributed to the pound’s 1.2% decline against the dollar this week. Pill said on Thursday it was essential interest rates stay at their current level in order to tame inflation. A rise in the greenback has also been a major factor in moves in the sterling/dollar pair – known as cable – and the dollar rose on Thursday after U.S. Federal Reserve officials including Fed Chair Jerome Powell said they were still not sure that interest rates are high enough.
But the British currency has also dropped against the euro, which has gained 0.7% on the pound this week, its biggest weekly gain since mid September. The European common currency was last at 87.32 pence, little changed against the pound on Friday.
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Global Markets
Reuters: Stocks in Asia rose on Monday while Treasuries and the dollar kept their composure, as investors took their lead from Wall Street’s Friday rally, shrugging off a Moody’s downgrade to the U.S. credit outlook. Tech stocks stood out, as they had in the U.S. at the end of last week, after the calming of long-term Treasury yields since the start of this month boosted the outlook for borrowing-dependent growth shares. U.S. 10-year Treasury yields were stable at around 4.646%, consolidating around the top of their range since Nov. 3, when softer labour market data spurred bets for a less hawkish Federal Reserve. The yield had been as high as 4.935% on Nov. 1.
The U.S. dollar index hovered below its post-payrolls-report high of 106.01, reached on Friday, last trading little changed around 105.80. Japan’s Nikkei rose 0.46%, with chip-related shares providing the biggest boost. Taiwan’s tech-heavy equity benchmark rallied 1.17%. Hong Kong’s Hang Seng gained 0.49% amid an outperformance in tech shares. However, mainland Chinese blue chips were slightly lower, and Australia’s resource-heavy benchmark slipped 0.13%. Nomura Securities strategist Naka Matsuzawa said equities are likely close to a peak.
“Up until now the market has been taking bad economic news as good news, because that would mean a pause in Fed rate hikes,” he said. “But now, the Treasury market has already priced in a pause, so there’s not much room for Treasury yields to fall further,” removing a support for the stock market, he added. “In short, I don’t think the stock market rally is going to continue.” The market paid little attention to a Moody’s announcement late on Friday that it had lowered its outlook on the U.S. credit rating to “negative” from “stable”.
The focus instead remains on upcoming economic data, with readings of U.S. consumer prices and retail sales due Tuesday and Wednesday, respectively. Meanwhile, crude oil prices eased on Monday as demand worries trumped supply concerns, amid slowing growth in the United States and China. Brent crude futures for January were down 35 cents, or 0.4%, at $81.08 a barrel, while the U.S. West Texas Intermediate crude futures for December were at $76.82, down 35 cents, or 0.5%. Both benchmarks gained nearly 2% on Friday as Iraq voiced support for oil cuts by OPEC+.
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Published by the Mercury Team on 13 November 2023
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