Reuters: The South African rand lifted on Wednesday after a U.S. Federal Reserve official flagged a possible interest rate cut in the coming months, while the local central bank said systemic risks to financial stability remained elevated.
South African rand lifted
The rand traded at 18.5700 against the dollar at 1530 GMT, about 0.2% stronger than its previous close. Hints about a rate cut from Christopher Waller – an influential and previously hawkish voice at the U.S. central bank – buoyed risk-sensitive currencies worldwide.
“The rand has recovered smartly off the lows reached last week, capitalising on broad-based dollar weakness as short-end U.S. Treasury yields dropped to levels last seen in July. This followed more talk from Fed officials about rate cuts,” said Danny Greeff at ETM Analytics. Greeff said traders would wait to see if Fed Chair Jerome Powell will use a speech on Friday to also lay the groundwork for rate cuts. “Should Powell do so, the rand would likely gain more bullish impetus into the weekend, South Africa’s idiosyncratic risks notwithstanding,” Greeff added.
The South African Reserve Bank’s biannual health check on the financial system on Wednesday flagged increasing government debt levels and servicing costs as concerns, along with the impact of being put on a “grey list” by a global financial crime watchdog. The benchmark 2030 government bond was stronger, the yield down 11 basis points at 9.915%. The Johannesburg Stock Exchange’s Top-40 index closed around 0.4% lower.
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U.S. Dollar
Reuters: The dollar was rooted near a three-month low on Thursday and was set to post its steepest monthly decline in a year as investors ramped up bets that the Federal Reserve is done with rate hikes ahead of a crucial inflation report later in the day. The dollar index, which measures U.S. currency against six rivals, eased 0.058% to 102.74, not far from 102.46 – its lowest since Aug. 10 it touched on Wednesday. The index is down 3.7% in November on growing expectations the Fed will cut interest rates in the first half of 2024.
The dollar clawed back some of its losses on Wednesday after data showed the U.S. economy grew faster in the third quarter than initially reported. “I think it’s still pretty much all about U.S. yields. And by extension FOMC policy,” said Carol Kong, currency strategist at Commonwealth Bank of Australia. “Markets will continue to play to focus on what FOMC officials say about the prospect of the upcoming rate-hike cycle.” Investor focus will be on comments from Fed Chair Jerome Powell, who is due to speak on Friday in the wake Fed Governor Christopher Waller on Tuesday flagging a possible rate cut in the months ahead.
But before that, spotlight will be on Thursday’s crucial personal consumption expenditure inflation report. Christopher Wong, currency strategist at OCBC, said the data will offer a glimpse into whether the disinflation trend seen so far remains intact. “If core PCE undershoots expectations to the downside, then USD may extend the move lower again.” U.S. financial conditions are the loosest since early September and have eased 100 basis points in a month, according to Goldman Sachs. The bank’s global and emerging market indexes ticked up a bit last week, but financial conditions are also looser by around 100 bps from a month ago.
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U.S. rates futures markets are now pricing in more than 100 basis points of rate cuts next year starting in May, and the two-year Treasury yield is its lowest since July – it has slumped nearly 40 basis points this week alone. The weakness in the dollar has allowed most Asian and regional currencies to take advantage. Two of the best-performers are at the polar opposite ends of the ‘carry’ spectrum – the New Zealand dollar and Japanese yen. The kiwi got an extra boost on Wednesday following the central bank’s ‘hawkish hold’ – policymakers kept the key cash rate at a relatively high 5.50%, but unexpectedly signalled that it could be raised again if inflation doesn’t moderate.
The currency was 0.26% higher at $0.6172, staying close to the four month peak of $0.6207 it touched on Wednesday. Meanwhile, expectations that the Bank of Japan will soon end its negative rate policy has pulled the yen up from the depths, and in the process, eased pressure on the central bank to support the currency via direct FX market intervention. On Thursday, yen strengthened 0.09% to 147.11 per dollar, remaining close to two and half month high of 146.675 per dollar it touched on Wednesday. Sterling was last at $1.2695, up 0.01% on the day, while the euro was up 0.06% at $1.0975. The Australian dollar rose 0.08% to $0.6623.
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British Pound
FXStreet: The GBP/USD pair attracts some buyers below the 1.2700 psychological mark during the early Asian session on Thursday. That being said, the softer US Dollar offers some support to the major pair. At press time, GBP/USD is trading near 1.2695, up 0.02% on the day. The US Bureau of Economic Analysis revealed on Thursday that the US economy grew to 5.2% in the third quarter from the previous reading of 4.9%, above the market consensus of 5.0%. Federal Reserve Governor Michelle Bowman said he sought to keep alive the possibility of more rate hikes, raising concerns about the longevity of inflationary pressure.
Earlier this week, Fed Governor Christopher Waller stated that the Fed does not need to hike rates further from here. Despite the mixed labor market and cooling inflation, investors will take more cues from the Core Personal Consumption Expenditure Price Index for October. The monthly and annual Core PCE are expected to ease to 0.2% and 3.5%, respectively. These figures could convince the Fed of the coming Fed decisions. On the UK’s front, Bank of England Governor Andrew Bailey said on Wednesday that the central bank will do what it takes to bring inflation down to its 2% target, adding that the central bank has not seen the progress yet to be confident.
Looking ahead, traders will closely monitor the Core PCE inflation data, due later on Thursday. Additionally, the US weekly Jobless Claims, the Chicago PMI, and Pending Home Sales will be released. In the absence of top-tier economic data released from the UK docket, the GBP/USD pair remains at the mercy of USD price dynamics.
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Global Markets
Reuters: Asian stocks were poised to clock their strongest performance in 10 months at the end of Thursday’s trading, even as most regional stock markets opened listless after mixed messages from the Fed and a similar struggle in U.S. stocks overnight. The MSCI Asia-ex-Japan stocks index is up 6.7% so far this month, setting it on course to mark the best month since January. South Korea’s KOSPI has led the rally in Asia with 10.5% gains this month, followed closely by Taiwan and Japan’s Nikkei Average index.
Stock markets around the world struggled on Wednesday, after a strong month driven by market expectations of peak Federal Reserve rates, and as a fall in the dollar and in U.S. bond yields loosened financial conditions. Ten-year U.S. yields are down more than 60 basis points in November, on track for the steepest monthly drop since late 2008. While U.S. central bank officials on Wednesday sent mixed messages, investors still focused on comments made on Tuesday by Fed Governor Christopher Waller, an influential and previously hawkish voice at the bank. Waller had said rate cuts could begin in months if inflation keeps easing.
Meanwhile, data from the U.S. showed a strong economy in the third quarter and also a downtrend in inflation, reinforcing expectations the Fed might cut interest rates earlier than expected. “We think liquidity and momentum can still support markets through December,” said Redmond Wong, market strategist, Greater China at Saxo Markets, and that rate cuts could be as early as the first quarter as U.S. economy has shown signs of deceleration. U.S. financial conditions are the loosest since early September and have eased 100 basis points in a month, according to Goldman Sachs.
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The bank’s global and emerging market indexes ticked up a bit last week, but financial conditions are also looser by around 100 bps from a month ago. U.S. rates futures markets are now pricing in more than 100 basis points of rate cuts next year starting in May, and the two-year Treasury yield is its lowest since July – it has slumped nearly 40 basis points this week alone. “Absent rapid Fed easing, we expect a more challenging macro backdrop for stocks next year with softening consumer trends at a time when investor positioning and sentiment have mostly reversed,” analysts at J.P.Morgan said in a note on their 2024 global outlook.
“Equities are now richly valued with volatility near the historical low, while geopolitical and political risks remain elevated. We expect lackluster global earnings growth with downside for equities from current levels.” Elsewhere in China, a closely watched factory survey showed manufacturing activity contracted for a second straight month in November and at a quicker pace, suggesting more government support is needed to help shore up economic growth. Hong Kong’s Hang Seng Index and China’s benchmark CSI300 Index both opened down 0.1%. The Chinese benchmark is down over 2% in November.
Oil prices rose more than $1 on Wednesday as investors looked past a jump in U.S. crude, gasoline and distillate stock piles and focused on an upcoming meeting of OPEC+, the Organization of the Petroleum Exporting Countries and allies such as Russia. Talks ahead of the meeting were focusing on additional cuts, although details have yet to be agreed, sources close to the group told Reuters. U.S. crude on Thursday dropped 0.33% to $77.6 per barrel and Brent was down 0.34% at $82.82. Spot gold edged up 0.03% to reach $2,045.29 an ounce.
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Published by the Mercury Team on 30 November 2023
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