South African rand gained against the dollar which fell on Tuesday

Reuters: The South African rand gained against the dollar on Tuesday as the U.S. currency fell ahead of inflation data, which could provide some clues on the monetary policy trajectory of the Federal Reserve.

South African Rand gained against the dollar

At 1556 GMT, the rand traded at 18.3825 against the dollar, 0.58% stronger than its previous close. The dollar index, which measures the currency against six rivals, was last trading down 0.23% at 102.23 following strong gains the previous day. On the Johannesburg Stock Exchange, the Top-40 index closed 1.22% higher, while the broader all-share index closed up 1.14%. “The sustainability of gains in the rand and on the JSE all-share index are likely to be tested in a news-heavy week,” Shaun Murison, senior market analyst at IG, told Reuters.

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Wednesday’s release of U.S. inflation data and minutes from March’s Federal Open Market Committee meeting may cause short-term market volatility, he added. Meanwhile in South Africa, local manufacturing data released on Tuesday showed a 5.2% drop in annual output for February. South Africa’s benchmark 2030 government bond was marginally higher, with the yield down 1 basis point to 9.93%.

British Pound

Reuters: The British pound rose for the first day in five against a softening dollar on Tuesday as risk-sentiment improved, helping to push sterling towards the 10-month high it reached last week. The pound was last up 0.4% at $1.2431, having dropped on the four previous trading sessions. “The risk-correlated currency continues to swing with global investor sentiment,” George Vessey, FX & macro strategist at Convera, said. “The rebound in risk appetite this morning has seen equities rally across the board along with the highly correlated British pound.” World stocks were higher on Tuesday, with European markets leading the way as traders bet that interest rates would soon peak and come down later this year.

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The Bank of England is not scheduled to hold a policy meeting until next month, but Governor Andrew Bailey is scheduled to speak on Wednesday and could give clues on the future path for monetary policy. “Chief economist Huw Pill had a speech last week that was more on the hawkish side but Bailey, as governor, is likely to take a more cautious approach and won’t want to pre-commit to any action,” Danske Bank FX analyst Kirstine Kundby-Nielsen said. “Given the very large surprise we saw in inflation last time, we still think the Bank of England will hike by 25 basis points in May,” she added. Traders price in around a 75% chance of a 25 basis point hike in May, with around a 25% chance the central bank keeps rates unchanged.

Britain’s finance ministry on Tuesday named Megan Greene, global chief economist at Kroll, to succeed Silvana Tenreyro on the BoE’s Monetary Policy Committee after Tenreyro’s term ends in July. Tenreyro is one of the most dovish members on the MPC, and last week said the central bank might need to start cutting interest rates sooner than previously thought. “She brings significant experience from her work across financial services and academia and we will benefit greatly from her contributions to our policy discussions,” BoE’s Bailey said in a statement.

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The pound was a touch softer against the euro with the single currency buying 87.84 pence. “The euro area and Britain’s economies are being hit by the same forces. Inflation is not coming down sufficiently and they’re both energy importers,” Danske Bank’s Kundby-Nielsen said. “Euro-sterling should stay rangebound given that we don’t really see diverging factors in monetary policy and the growth outlook.” Meanwhile, British retailers reported a boost in spending from Mother’s Day purchases in March, during an otherwise downbeat sales period when cost of living pressures and unusually wet weather kept shoppers at home.

US Dollar

Reuters: The dollar dipped on Wednesday against most major currencies, with the exception of the yen, with investors expecting U.S. inflation data out later in the global day to hold some clue on how soon U.S. interest rates will peak. Against a basket of currencies, the U.S. dollar index fell 0.07% to 102.05. The euro was last 0.12% higher at $1.0926 and sterling rose 0.02% to $1.2430, with both currencies some distance away from their one-week lows hit on Monday. The U.S. inflation data for March is forecast to come in at 5.2% year-on-year, down from 6.0% previously, while core inflation likely ticked higher to 5.6%, according to a Reuters poll of economists. “It could be the difference between a 25bp hike or pause at the Fed’s next meeting in May,” said Matt Simpson, senior market analyst at City Index, adding that money markets could “quickly revert to reprice a policy pause” if the inflation data comes in softer than expected.

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Money markets are pricing in a roughly 74% chance that the Fed will raise rates by 25 basis points next month, though multiple rate cuts are also being priced in as early as July through to the end of the year. A raft of Fed speakers on Tuesday offered little guidance on how much further U.S. interest rates would rise. New York Fed President John Williams said it depended on incoming data. Philadelphia Fed Bank President Patrick Harker said he felt that the end of rate hikes may be near, while Chicago Fed President Austan Goolsbee said that the U.S. central bank should be patient about raising interest rates in the face of recent banking sector stress. Banking turmoil sparked by the collapse of Silicon Valley Bank last month has added to bets that the Fed would not raise rates as high as previously feared in order to ease stress on the sector.

Against the yen , the dollar rose to a nearly one-month high of 134.045, a reflection of the stark contrast between the Fed’s aggressive monetary policy tightening cycle and the Bank of Japan’s ultra-loose policy. The International Monetary Fund said in its global financial stability report released on Tuesday that the Bank of Japan could help prevent abrupt policy changes later by allowing more flexibility in its yield curve control policy. Elsewhere, the Aussie rose 0.32% to $0.6675, while the kiwi gained 0.19% to $0.6204. In cryptocurrencies, bitcoin slipped marginally to $30,001, holding above the key $30,000 level after breaching it for the first time in 10 months on Tuesday. Ether, the second largest cryptocurrency, stood at $1,867.90.

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Global Markets

Reuters: Asian equities drifted lower on Wednesday ahead of a crucial U.S. inflation report that will likely influence how soon the Federal Reserve will end its aggressive rate hikes, with markets betting on at least one more at next month’s policy meeting. MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.17% lower in choppy trading, set to snap its three day winning streak. The subdued mood looked set to continue in Europe, with futures indicating a broadly lower open. The Eurostoxx 50 futures was down 0.16%, German DAX futures up 0.01% and FTSE futures down 0.07%. After Friday’s jobs report showed a resilient U.S. labour market, emboldening bets of a 25 basis point hike at the Fed’s next meeting in May, investor attention is firmly on the March inflation report due later in the day.

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The consumer price index is expected to show core inflation rose 0.4% on a monthly basis and 5.6% year-over-year in March, according to a Reuters poll of economists. “The focus will shift from the decline in the headline inflation towards underlying inflation pressures and how sticky it might be which could have an impact on how long the Fed needs to leave the interest rates at higher levels,” Shane Oliver, head of investment strategy at AMP Capital in Sydney.

Oliver said a risk to markets is that narrative changes from inflation to risk of recession and the markets aren’t particularly worried about it at present, because it has been talked about for so long and it hasn’t happened yet. Markets are now pricing in a 66% chance of the Fed raising interest rates by 25 basis points in May and then pausing for the subsequent meetings, according to the CME FedWatch tool. Philadelphia Federal Reserve Bank President Patrick Harker on Tuesday said he feels the U.S. central bank may soon be done raising interest rates, but reiterated the desire to bring inflation back to its 2% target. The Fed last month raised interest rates by a quarter of a percentage point, taking it to a range of 4.75% to 5.00%. “I’m in the camp of getting up above 5 and then sitting there for a while,” Harker said. Minutes of its March meeting are due to be released later in the day and investors will parse through it for clues on Fed’s monetary path of the central bank as well as the impact of the stress in the banking sector.

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The International Monetary Fund warned on Tuesday that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year as it lowered its 2023 global growth forecasts. The turmoil in the banking sector following the failure of Silicon Bank and Signature Bank had spurred some expectations that the Fed may need to cut interest rates to alleviate some of the stress in the market but a sticky inflationary environment is unlikely to give the Fed much room. The cut in oil production announced by the OPEC+ group last week also fanned fears of inflation flaring up, and for investors to really lower their concerns over inflation there will have to be a clear fall in prices for services, Saxo Markets strategists said. “We don’t think we are there yet. With oil prices rising again and labour market cooling only gradually, risk remains tilted for core inflation to remain elevated for longer,” they said. China shares were mixed, with the Shanghai Composite Index up 0.4% while Hong Kong’s Hang Seng Index sank 1.2% as investors weighed rising geopolitical tensions.

China said on Wednesday that President Tsai Ing-wen was pushing Taiwan into “stormy seas” after Beijing held military exercises in response to Tsai’s recent meeting with U.S. House Speaker Kevin McCarthy in California. Tsai said the overseas trip, which included the meeting with McCarthy in the United States and stops in Guatemala and Belize, showed Taiwan’s determination to defend freedom and democracy. Elsewhere in Asia, Japan’s Nikkei was 0.6% higher, while Australia’s S&P/ASX 200 index rose 0.41%. In the currency market, the dollar index , which measures the U.S. currency against six rivals, eased 0.049%. The euro was up 0.12% at $1.0923, while sterling was last trading at $1.2435, up 0.09% on the day. The yen weakened 0.09% to 133.80 per dollar. The IMF said the Bank of Japan could help prevent abrupt policy changes later by allowing more flexibility in its bond yield curve control. U.S. crude rose 0.06% to $81.58 per barrel and Brent was at $85.65, up 0.05% on the day. Spot gold added 0.8% to $2,018.25 an ounce. U.S. gold futures gained 0.55% to $2,015.90 an ounce.

Published by the Mercury Team on 12 April 2023

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