South African rand, Eskom bonds strengthen after budget speech.

Reuters: Sterling retreated on Wednesday, after surging on the back of stronger-than expected British business activity, as traders awaited consumer confidence data and focused on Britain’s political headaches.

BRITISH POUND

After strengthening 0.6% against the dollar on Tuesday, sterling was down 0.24% to $1.2083 at 1151 GMT. Against the euro, it was steady at 87.93, having climbed 1% on Tuesday. Data showed on Tuesday an unexpected bounce in Britain’s preliminary “flash” S&P Global/CIPS UK Composite Purchasing Managers’ Index, boosting speculation the country might avoid a long recession and bets the Bank of England (BoE) might keep rates higher for longer.

The PMI data came in the wake of stronger-than-expected retail sales, but looking ahead markets will be focusing on the Northern Ireland post Brexit trade agreement impasse, and on GFK consumer confidence data due later this week, said Jeremy Stretch, head of G10 FX strategy at CIBC. “The realisation that the latter remains near lows, underlining a degree of consumer reticence is likely to combine with ongoing UK political headaches relating to the Northern Ireland protocol,” Stretch said, pointing to a likely correction back towards $1.2005/15. Britain and the European Union are edging closer to resolving their dispute over the so-called Northern Ireland protocol, which sets out the conditions for post-Brexit trade with the province to avoid creating a hard border with EU member Ireland and to help protect the bloc’s single market. But political discussions are ongoing.

Keeping sterling afloat against a strengthening dollar, money markets are now pricing a 99% chance of the BoE raising rates by a further quarter of a percentage point on March 23. UK rates are seen as most likely to peak at 4.75% later this year, in contrast to many economists’ previous expectations that March’s rate rise would be the last in the BoE’s current tightening cycle.

US DOLLAR

Reuters: The dollar stood near a seven-week high against the euro and the Aussie on Thursday, as expectations the Federal Reserve is likely to stay on its aggressive rate-hike path, reinforced by minutes from its last policy meeting, set the tone for markets. Nearly all Fed policymakers favoured a scale down in the pace of interest rate hikes at the U.S. central bank’s last policy meeting, minutes from the Jan. 31-Feb. 1 FOMC meeting showed on Wednesday. However, they also indicated curbing unacceptably high inflation would be the “key factor” in how much further rates need to rise. The dollar paused its ascent on Thursday after gaining broadly on the back of the release.

The euro edged marginally higher to $1.0608 on Thursday, but was pinned near a roughly seven-week trough of $1.0598 hit in the previous session. Similarly, the Aussie rose 0.15% to $0.6815, after falling more than 0.7% on Wednesday, further pressured by a miss in forecasts for Australian wage growth last quarter. Trading was thinned on Thursday with markets in Japan closed for a holiday. “The meeting minutes were pretty much within expectations … the markets are now pricing for higher-for-longer rates,” said Tina Teng, market analyst at CMC Markets. “The resilience (of the U.S. economy) prompts the Fed to keep raising interest rates, pushing up the U.S. dollar.”

Elsewhere, sterling steadied at $1.2046 after its 0.6% slide in the previous session, while the New Zealand dollar rose 0.1% to $0.6226. The kiwi continued to draw some support from the Reserve Bank of New Zealand’s hawkish rate rise on Wednesday, after the central bank signalled further tightening ahead to tame high inflation. Against a basket of currencies, the U.S. dollar index stood at 104.50, and was attempting to break a more than one-month peak of 104.67 hit last week. “The Fed is likely to stick with the majority view of 25bp hikes, but the question is for how long,” said strategists at Macquarie. “We expect that the answer will remain much more highly dependent on the inflation data than the unemployment rate data, insofar as the Fed can always rationalise a low unemployment rate as the result of greater matching efficiency between employers and workers seeking to fill job openings.”

In Asia, the Japanese yen edged higher to 134.83 per dollar, with eyes now on incoming Bank of Japan (BOJ) Governor Kazuo Ueda’s speeches. Ueda will speak in parliament on Friday and next Monday, and could potentially offer some clues on how soon the BOJ could end its bond yield control policy.

SOUTH AFRICAN RAND

Reuters: South Africa’s rand strengthened against the U.S. dollar and dollar-denominated bonds of Eskom rose, after the finance minister said in his 2023 budget speech that the government would take on more than half of the state utility’s debt. At 16:19 GMT, the rand traded at 18.1700 per dollar, about 0.42% stronger than its previous close. Earlier in the day before the budget speech, it had hit 18.38, its lowest since November. South African Finance Minister Enoch Godongwana said in his budget speech to South Africa’s parliament that the government would take on 254 billion rand ($14 billion) of Eskom’s 423-billion-rand debt, which he said was at risk of default.

However, Godongwana told Reuters in an interview that the debt relief given to the utility is the last and there would be no more bailouts in the future. Eskom’s dollar-denominated bonds reacted positively to the news and rose as much as 2.47 cents in the dollar, with the two non-government-guaranteed maturities benefiting the most. “This budget should be a welcome surprise for the market, which did not expect much detail with regards to Eskom allocations,” Deutsche Bank economist Danelee Masia said. South Africa has been struggling for years to overhaul Eskom, which is implementing the worst blackouts on record, is plagued by corruption and mismanagement and has received 263.4 billion rand in government bailouts since 2008/09.

Hours of daily power cuts have crippled businesses in Africa’s most industrialised economy and weakened growth, which Godongwana forecast would be 0.9% this year, down from a previous forecast of 1.4%. Meanwhile, Andre Botha, a senior dealer at TreasuryONE said whether the debt relief would be enough remained to be seen. “While it is encouraging that the government wants to take over some of Eskom’s debt… Whether this is enough to relief some of the Eskom load remains to be seen,” he said. On the Johannesburg Stock Exchange, the broader all-share index .JALSH closed down 0.81%, while the top-40 index .JTOPI ended 0.87% lower. The government’s benchmark domestic 2030 bond ZAR2030= strengthened after having fallen earlier in the day, with the yield down 10 basis points to 10.155%.

GLOBAL MARKETS

Reuters: Asian stock markets were pinned near seven-week lows on Thursday while the dollar stood at multi-week peaks, as a run of strong economic data had investors worrying interest rates will need to keep rising and stay high to put the brakes on inflation. MSCI’s broadest index of Asia-Pacific shares outside Japan touched its lowest since Jan. 6 in early trade. It ground 0.5% higher as the morning wore on. Nasdaq futures rose 0.9% after a revenue beat at chip designer Nvidia sent its shares up 9% after-hours. Oil nursed sharp overnight losses, and Brent crude futures clung to support around $80 a barrel on Thursday. Japanese markets were closed for a national holiday. Wall Street indexes fell overnight and are eyeing their worst week of the year so far as stronger-than-forecast U.S. labour, inflation, retail sales and manufacturing figures have traders pricing interest rates staying higher for longer. Minutes from this month’s Federal Reserve meeting – reinforcing a hawkish tone – did little to shift the concern.

“Markets have been forced to reprice interest rate expectations, not just higher, but also questioning the view that once peak rates are hit, central banks will pivot quickly to cutting interest rates,” said ANZ economist Finn Robinson. “Economic resilience is to be lauded,” he said. “But central banks are uncomfortable with current levels of aggregate expenditure and labour market demand…if the upcoming run of February data for the U.S. confirm robust economic activity, it is difficult to see how risk will recover in the near term.” S&P 500 futures drifted 0.4% higher in Asia. The Bank of Korea did, however, offer some dose of relief by ending a year-long run of uninterrupted rate hikes with a pause. The Kospi rose 1% and led gains in the region with most other markets drifting. Results season drove stock movements in Australia. Flag carrier Qantas Airways posted a record first-half profit but shares suffered their biggest drop in a year – down 7.3% – after the company warned fares would probably fall.

“The market is stretched so they’ll panic on shadows,” said Mathan Somasundaram, founder at analytics firm Deep Data Analytics in Sydney. “We are seeing more and more evidence that consumers are stretched, consumer spending is going to be curbed,” he said, pointing to a strong result from grocer Woolworths that suggested more people are cooking as restaurant prices rise. Currency trade was quietened by Japan’s holiday. The dollar lingered near its strongest levels since early January, though without being able to break to fresh highs. The Australian and New Zealand dollars moved a little higher off strong support levels, with the Aussie last up 0.4% to $0.6832 and the kiwi up by the same margin to $0.6242. The euro steadied at $1.0619 while the yen, which has been grinding lower, last traded at 134.80 per dollar. Speculation is rife that a policy change is nigh in Japan. Inflation data due on Friday and a Monday appearance from Bank of Japan governor nominee Kazuo Ueda are seen offering clues to the timing.

U.S. Treasuries rallied overnight but a hawkish tone in the Fed minutes knocked the wind out of gains. Ten-year notes were untraded in Asia due to the holiday in Tokyo. Gold steadied at $1,825 an ounce. Final European inflation and U.S. growth figures are due later in the day, though no major tweaks to preliminary numbers are expected. Fed officials Mary Daly and Raphael Bostic are also due to make appearances later on Thursday.

Published by the Mercury Team on 23 February 2023

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